UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 2009
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from
to
Commission File Number: 000-32743
ZHONE TECHNOLOGIES, INC.
(Exact name of registrant
as specified in its charter)
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Delaware
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22-3509099
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.)
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7001 Oakport Street
Oakland, California 94621
(Address of principal executive office)
Registrants telephone
number, including area code: (510) 777-7000
Securities registered pursuant to Section 12(b) of the Act:
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Common Stock, $0.001 Par Value
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The Nasdaq Stock Market LLC
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(Title of class)
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(Name of each exchange on which registered)
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
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No
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
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No
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes
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No
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be filed to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes
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No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or
a smaller reporting company. See definitions of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if a smaller reporting
company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
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No
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As of March 12, 2010, there were 30,300,085 shares outstanding of the registrants common stock, $0.001 par value.
As of June 30, 2009 (the last business day of the registrants most recently completed second fiscal quarter), the aggregate market value of common stock held by non-affiliates of the registrant was approximately $35,589,479.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrants definitive Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K where indicated.
TABLE OF CONTENTS
Forward-looking Statements
This Annual Report on Form 10-K, including Managements Discussion and Analysis of Financial Condition and Results
of Operations, contains forward-looking statements regarding future events and our future results that are subject to the safe harbors created under the Securities Act of 1933 and the Securities Exchange Act of 1934. These statements are based
on current expectations, estimates, forecasts and projections about the industries in which we operate and the beliefs and assumptions of our management. We use words such as anticipate, believe, continue,
could, estimate, expect, goal, intend, may, plan, project, seek, should, target, will, would,
variations of such words and similar expressions to identify forward-looking statements. In addition, statements that refer to projections of earnings, revenue, costs or other financial items; anticipated growth and trends in our business or key
markets; future growth and revenues from our Single Line Multi-Service (SLMS) products; future economic conditions and performance; anticipated performance of products or services; plans, objectives and strategies for future operations; and other
characterizations of future events or circumstances, are forward-looking statements. Readers are cautioned that these forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to
predict, including those identified under the heading Risk Factors in Item 1A, elsewhere in this report and our other filings with the SEC. Therefore, actual results may differ materially and adversely from those expressed in any
forward-looking statements. We undertake no obligation to revise or update any forward-looking statements for any reason.
PART I
Company
Overview
We design, develop and manufacture communications network equipment for telecommunications,
wireless and cable operators worldwide. We believe that these network service providers can increase their revenues and lower their operating costs by using our products to deliver high quality video and interactive entertainment and Internet
Protocol (IP) enabled next generation voice services in addition to their existing voice and data service offerings, all on a platform that permits a seamless migration from legacy technologies to a converged packet-based architecture. Our mature
Single Line Multi-Service (SLMS) architecture provides cost-efficiency and feature flexibility with support for voice over internet protocol (VoIP) and IP entertainment (IPTV). Within this versatile SLMS architecture, our products allow service
providers to deliver all of these and other next generation converged packet services over their existing copper lines while providing support for fiber or Fiber to the home or business (FTTx) build-out. With our products and solutions, network
service providers can seamlessly migrate from traditional circuit-based networks to packet-based networks and from copper-based access lines to fiber-based access lines without abandoning the investments they have made in their existing
infrastructures.
In addition to our established product offerings, Zhone launched the new flagship MXK IP
Multi-service Terabit Access Concentrator (MXK) and multiple new Optical Line Terminal (OLT) and outdoor units in 2009. Our new MXK product is a converged multi-services access platform that can be configured as a Gigabit Passive Optical Network
(GPON) or Active Ethernet OLT. The MXK GPON line module is ITU-T G.984 compliant, delivering data throughputs of up to 2.5 Gbps downstream and 1.25 Gbps upstream. Each line card is designed for up to 64 passive splits per fiber. Active Ethernet
delivers up to 100 Mbps point-to-point from a 20-port card.
Zhones MXK product supports the next
generation of high-performance business and residential FTTx services. Unlike most competing products, MXK has the ability to support both Passive Optical Network (PON) and Active Ethernet fiber technologies to the node, curb or premises. With our
MXK product, service providers can offer digital or Ratio Frequency (RF) video, high-bandwidth Internet access, VoIP and cell relay services from a single OLT over IP. Additionally, our MXK product provides Zhone with industry leading density
featuring an 8 port GPON Module enabling support for up to 9,216 GPON subscribers in a single MXK chassis.
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The flexibility of our MXK product enables service providers to choose the
best technology for both services and network architecture. Active Ethernet provides dedicated high symmetric bandwidth to the end customers and makes it an excellent technology for deployment of business services. GPON provides a cost-effective way
to deliver high bandwidth to the residence for a robust triple play offering while enabling a host of high speed data and video options for the businesses. In addition to Active Ethernet and dense GPON support, the MXK provides a wide array of
multi-service functionality supporting well defined access standards enabling the convergence of voice, data and entertainment over any access medium delivering high-performance all IP solutions designed for todays traffic mix.
Corporate Information
We were incorporated in Delaware under the name Zhone Technologies, Inc. in June 1999, and in November 2003, we consummated our merger with Tellium, Inc. Although Tellium acted as the legal acquirer, due
to various factors, including the relative voting rights, board control and senior management composition of the combined company, Zhone was treated as the acquirer for accounting purposes. Following the merger, the combined company was
renamed Zhone Technologies, Inc. and retained substantially all of Zhones previous management and operating structure. The mailing address of our worldwide headquarters is 7001 Oakport Street, Oakland, California 94621, and our telephone
number at that location is (510) 777-7000. Our website address is
www.zhone.com
. The information on our website does not constitute part of this report. Through a link on the Investor Relations section of our website
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we make
available the following filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. All such filings are available free of charge.
Industry Background
Over the past decade, the
communications network industry has experienced rapid expansion as the internet and the proliferation of bandwidth intensive applications and services have led to an increased demand for high bandwidth communications networks. The broad adoption of
new technologies such as MP3 players, digital cameras and high definition televisions allow music, pictures, user-generated content (as found on the many video-sharing sites) and high definition video to be a growing part of consumers regular
exchange of information. All of these new technologies share a common dependency on high bandwidth communication networks and sophisticated traffic management tools. However, network service providers have struggled to meet the increased demand for
high speed broadband access due to the constraints of the existing communications network infrastructure. This infrastructure consists of two interconnected networks:
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the core network, which interconnects service providers with each other; and
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the access network, which connects end-users to a service providers closest facility.
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To address the increased demand for higher transmission speeds via greater bandwidth, service providers have expended
significant capital over the past decade to upgrade the core network by replacing much of their copper infrastructure with high-speed optical infrastructure. While the use of fiber optic equipment in the core network has relieved the bandwidth
capacity constraints in the core network between service providers, the access network continues to be a bottleneck that severely limits the transmission speed between service providers and end-users. As a result, communications in the
core network can travel at up to 10 gigabits per second, while in stark contrast, many communications over the access network throughout the world still occur at a mere 56 kilobits per second, a speed that is 175,000 times slower. At 56
kilobits per second, it may take several minutes to access even a modestly media laden website and several hours to download large files. Fiber access lines have the potential to remedy this disparity, but re-wiring every home or business with
fiber optic cable is both cost prohibitive and extremely time consuming. Consequently, solving the access network bottleneck has typically required more efficient use of the existing copper wire infrastructure and support for the gradual migration
from copper to fiber.
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In an attempt to deliver high bandwidth services over existing copper wire
in the access network, service providers began deploying digital subscriber line (DSL) technology over a decade ago. However, this early DSL technology has practical limitations. Copper is a distance sensitive medium in that the amount of bandwidth
available over a copper wire is inversely proportional to the length of the copper wire. In other words, the greater the distance between the service providers equipment and the customers premises, the lower the bandwidth. Unfortunately,
most DSL services available today are provided by first generation DSL access multiplexer (DSLAM) equipment. These large unwieldy devices require conditioned power and a climate controlled environment typically found only in a telephone
companys central office, which is often at great distance from the customer. While adequate for basic data services, these first generation DSLAMs were not designed to meet the needs of todays high bandwidth applications. The modest
bandwidth provided by existing DSLAM equipment is often incapable of delivering even a single channel of standard definition video, much less multiple channels of standard definition video or high definition video.
More recently, regulatory changes have introduced new competitors in the telecommunication services industry. Cable
operators, with extensive networks designed originally to provide only video programming, have collaborated to adopt new packet technologies that leverage their hybrid fiber/coaxial cable infrastructure. Using more recent technologies, cable
operators have begun to cost-effectively deliver new service bundles. The new service offerings provide not only enhanced features and capabilities, but also allow the cable operators to deliver these services over a common network. The resulting
cost-efficiencies realized by cable operators are difficult for incumbent telephone companies to match. Even with the telephone companies legacy voice switches fully paid for, maintaining separate networks for their circuit-based voice and
packet-based video and data networks is operationally non-competitive. Perhaps even more important than economic efficiencies, by integrating these services over a common packet infrastructure, cable operators will realize levels of integration
between applications and new features that will be difficult to achieve from a multi-platform solution. Despite these benefits, coaxial cable has its own share of limitations. Unlike DSL, coaxial cable shares its bandwidth among all customers
connected to it. Consequently, as new customers are added to coaxial cable networks, performance decreases. As a shared medium, large numbers of subscribers who simultaneously access the same segment of the coaxial cable network can potentially
compromise performance and security. This represents a source of strategic advantage for telecom operators who employ technology designed to maximize their service capabilities on the point-to-point (i.e. not shared) architecture of their copper
infrastructure. This increased competition has placed significant pressure on all network service providers. With significant service revenues at risk, these service providers have started to make investments to upgrade their networks and broaden
their service offerings. In response to these competitive pressures, existing service providers often seek ways to modernize their legacy networks, to enable delivery of additional high bandwidth, high margin services, and to lower the cost of
delivering these services.
The Zhone Solution
We believe that we are the first company dedicated solely to developing the full spectrum of next-generation access network
solutions to cost-effectively deliver high bandwidth services while simultaneously preserving the investment in legacy networks. Our next-generation solutions are based upon our Single Line Multi-Service, or SLMS, architecture. From its inception,
this SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as voice, data and video distribution), rather than being based on a particular protocol or media. In other words, our SLMS products
are built to support the migration from legacy circuit to packet technologies and from copper to fiber technologies. This flexibility and versatility allows our products to adapt to future technologies while allowing service providers to focus on
the delivery of additional high bandwidth services. Because this SLMS architecture is designed to interoperate with existing legacy equipment, service providers can leverage their existing networks to deliver a combination of voice, data and video
services today, while they migrate, either simultaneously or at a future date, from legacy equipment to next-generation equipment with minimal interruption. We believe that our SLMS solution provides an evolutionary path for service providers using
their existing infrastructures, as well as giving newer service providers the capability to deploy cost-effective, multi-service networks that can support voice, data and video.
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Triple Play Services with Converged Voice, Data and Video
SLMS
simplifies the access network by consolidating new and existing services onto a single line. This convergence of services and networks simplifies provisioning and operations, ensures quality of service and reliability, and reduces the time required
to provide services. SLMS integrates access, transport, customer premises equipment, and management functions in a standards-based system that provides scalability, interoperability and functionality for voice, data and video services.
Packet Migration
SLMS is a flexible multi-service architecture that provides current services
while simultaneously supporting migration to a pure packet network. This flexibility allows service providers to cost-effectively provide carrier class performance, and functionality for current and future services without interrupting existing
services or abandoning existing subscribers. SLMS also protects the value of the investments made by residential and commercial subscribers in equipment, inside wiring and applications, thereby minimizing transition impact and subscriber attrition.
Fiber to the Home, Premise, Node, or Curb (FTTx)
We provide support for the full range of
fiber-based access network architectures that are seeing increased use by carriers. In many markets worldwide, both business and residential demand for bandwidth is growing to the point where the deployment of fiber in the access network is
increasingly desirable. Where copper loops are plentiful and where civil restrictions make fiber deployment all the way to the customer premises prohibitively expensive, if not impossible, many operators are choosing to deploy fiber from central
offices to neighborhoods and then using VDSL2 over copper to deliver broadband connectivity over the last hundred meters or so. In other circumstances operators choose to deploy passive optical networks (PON) all the way to the customer premises,
where a single fibers bandwidth is shared through splitters with up to 64 subscribers. Some circumstances demand so-called home run fiber networks (with dedicated fiber resources linking every customer directly to the central
office) to maximize bandwidth or service segmentation. By supporting all these architectures within a common SLMS-based platform, we provide carriers maximum flexibility to build the network that best suits their needs.
Ethernet Service Delivery
We offer a complete array of equipment that allows carriers to deliver ethernet
services over copper or fiber. For business subscribers, our ethernet over copper product family allows carriers to quickly deliver ethernet services over existing copper SHDSL or T1/E1 circuits. Multiple circuits can be bonded to provide over 70
Megabits per second, enough to deliver ample ethernet bandwidth to satisfy business subscribers growing service requirements. This copper-based solution provides a compelling alternative to burying fiber and dedicating valuable fiber strands
to long-haul ethernet services to small and medium enterprises.
The Zhone Strategy
Our strategy has been to combine internal development with acquisitions of established access equipment vendors to achieve
the critical mass required of telecommunications equipment providers. We expect that our future growth will focus primarily on organic growth in emerging technology markets. Going forward, the key elements of our strategy include:
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Expand Our Infrastructure to Meet Service Provider Needs
. Network service providers require extensive support and integration with
manufacturers to deliver reliable, innovative and cost-effective services. By combining advanced, computer-aided design, test and manufacturing systems with experienced, customer-focused management and technical staff, we believe that we have
established the critical mass required to fully support global service provider requirements. We continue to expand our infrastructure through ongoing development and strategic relationships, continuously improving quality, reducing costs and
accelerating delivery of advanced solutions.
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Continue the Development and Enhancement of Our SLMS Products
. Our SLMS architecture is the cornerstone of our product development strategy.
The design criteria for SLMS products include carrier-class reliability, multi-protocol and multi-service support, and ease of provisioning. We intend to
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continue to introduce SLMS products that offer the configurations and feature sets that our customers require. In addition, we have introduced products that adhere to the standards, protocols and
interfaces dictated by international standards bodies and service providers. In 2009, we introduced our MXK product, a new flagship SLMS product that provides a converged multi-services access platform. To facilitate the rapid development of our
existing and new SLMS architecture and products, we have established engineering teams responsible for each critical aspect of the architecture and products. We intend to continue to leverage our expertise in voice, data and video technologies to
enhance our SLMS architecture, supporting new services, protocols and technologies as they emerge. To further this objective, we intend to continue investing in research and development efforts to extend the SLMS architecture and introduce new SLMS
products.
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Deliver Full Customer Solutions
. In addition to delivering hardware and software product solutions, we provide customers with pre-sales and
post-sales support, education and professional services to enable our customers to more efficiently deploy and manage their networks. We provide customers with application notes, business planning information, web-based and phone-based
troubleshooting assistance and installation guides. Our support programs provide a comprehensive portfolio of support tools and resources that enable our customers to effectively sell to, support and expand their subscriber base using our products
and solutions.
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Product Portfolio
Our products provide the framework around which we are designing and developing high speed communications software and equipment for the access network. All of the products listed
below are currently available and being shipped to customers. Our products span two distinct categories:
SLMS Products
Our SLMS products address three areas of customer requirements. Our Broadband Aggregation and Service
products aggregate, concentrate and optimize communications traffic from copper and fiber networks. These products are deployed in central offices, remote offices, points of presence, curbsides, data and co-location centers, and large enterprises.
Our Customer Premise Equipment, or CPE, products offer a cost-effective solution for combining analog voice and data services to the subscribers premises over a single platform. The Zhone Management System, or ZMS, product provides optional
software tools to help manage aggregation and customer premises network hardware. These products deliver voice, data and video interface connectivity for broadcast and subscription television, internet routers and traditional telephony equipment.
Our SLMS products include:
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Category
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Product
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Function
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Broadband Aggregation and Service
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MXK
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Multi-Service Terabit Access Concentrator
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MALC
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Multi-Access Line Concentrator
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Raptor
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Scalable DSLAM
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MALC-OLT
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FTTx Optical Line Terminal
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4000 /8000 /12000
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DSLAMs
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Customer Premise Equipment (CPE)
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EtherXtend
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Ethernet Over Copper
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16xx, 17xx, 6xxx
zNID
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Wireline/Wireless DSL Modems
Optical Network Terminals
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Network and Subscriber Management
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ZMS
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Zhone Management System
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Legacy, Service and Other Products
Our legacy products support a variety of voice and data services, and are broadly deployed by service providers worldwide.
Our legacy products during 2009 and 2008 included:
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Product
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Function
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IMACS
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Multi-Access Multiplexer
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GigaMux
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Optical Transport
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In January 2008, we sold our legacy GigaMux product line.
Global
Service & Support
In addition to our product offerings, we provide a broad range of service
offerings through our Global Service & Support organization. We supplement our standard and extended product warranties with programs that offer technical support, product repair, education services and enhanced support services. These
services enable our customers to protect their network investments, manage their networks more efficiently and minimize downtime for mission-critical systems. Technical support services are designed to help ensure that our products operate
efficiently, remain highly available, and benefit from recent software releases. Through our education services program, we offer in-depth training courses covering network design, installation, configuration, operation, trouble-shooting and
maintenance. Our enhanced services offering is a comprehensive program that provides network engineering, configuration, integration, project management and other consultative support to maximize the results of our customers during the design,
deployment and operational phases. As part of our commitment to ensure around-the-clock support, we maintain a technical assistance center and a staff of qualified network support engineers to provide customers with 24-hour service, seven days a
week.
Technology
We believe that our future success is built upon our investment in the development of advanced technologies. SLMS is based on a number of technologies that provide sustainable advantages, including the
following:
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Services-Centric Architecture.
SLMS has been designed from inception for the delivery of multiple classes of subscriber services (such as
voice, data or video distribution), rather than being based on a particular protocol or media. Our SLMS products are built to interoperate in networks supporting packet, cell and circuit technologies. This independence between services and the
underlying transportation is designed to position our products to be able to adapt to future transportation technologies within established architectures and to allow our customers to focus on service delivery.
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Common Code Base.
Our SLMS products share a common base of software code, which is designed to accelerate development, improve software
quality, enable rapid deployment, and minimize training and operations costs, in conjunction with network management software.
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Network Management and Operations.
Our ZMS product provides management capabilities that enable rapid, cost-effective, and secure control of
the network; standards-based interfaces for seamless integration with supporting systems; hierarchical service and subscriber profiles to allow rapid service definition and provisioning, and to enable wholesaling of services; automated and
intelligent CPE provisioning to provide the best end-user experience and accelerate service turn-up; load-balancing for scalability; and full security features to ensure reliability and controlled access to systems and data.
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Test Methodologies.
Our SLMS architecture provides for interoperability with a variety of products that reside in networks in which we will
deploy our products. To ensure interoperability, we have built a testing facility to conduct extensive multi-vendor trials and to ensure full performance under valid network conditions. Testing has included participation with partners
certification and accreditation
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programs for a wide range of interoperable products, including soft switches, SAN equipment and management software. The successful completion of these processes is required by our largest
customers to ensure interoperability with their existing software and systems.
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Acquired Technologies.
Since our inception, we have completed twelve acquisitions pursuant to which we acquired products, technology and
additional technical expertise.
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Customers
We sell our products and services to network service providers that offer voice, data and video services to businesses, governments, utilities and residential consumers. Our global
customer base includes regional, national and international telecommunications carriers. To date, our products are deployed by over 700 network service providers on six continents worldwide. Emirates Telecommunications Corporation
(Etisalat) accounted for 19% of net revenue in 2009 and no customer accounted for 10% or more of net revenue in 2008.
Research
and Development
The industry in which we compete is subject to rapid technological developments, evolving
industry standards, changes in customer requirements, and continuing developments in communications service offerings. Our continuing ability to adapt to these changes, and to develop new and enhanced products, is a significant factor in maintaining
or improving our competitive position and our prospects for growth. Therefore, we continue to make significant investments in product development.
We conduct the majority of our research and product development activities at our Oakland, California campus. In Oakland, we have built an extensive communications laboratory with hundreds of access
infrastructure products from multiple vendors that serve as an interoperability and test facility. This facility allows us to emulate a communications network with serving capacity equivalent to that supporting a city of 350,000 residents. We also
have focused engineering staff and activities at additional development centers located in Alpharetta, Georgia; Largo, Florida; Westlake Village, California; and Portsmouth, New Hampshire.
Our product development activities focus on products to support both existing and emerging technologies in the segments of
the communications industry that we consider viable revenue opportunities. We are actively engaged in continuing to refine our SLMS architecture, introducing new products under our SLMS architecture, and creating additional interfaces and protocols
for both domestic and international markets.
We continue our commitment to invest in leading edge technology
research and development. Our research and product development expenditures were $22.1 million, $27.1 million, and $32.7 million, in 2009, 2008 and 2007, respectively. All of our expenditures for research and product development costs, as well as
stock-based compensation expense relating to research and product development, have been expensed as incurred. These amounts include stock-based compensation of $0.4 million, $0.5 million, and $0.7 million for 2009, 2008, and 2007, respectively. We
plan to continue to support the development of new products and features, while seeking to carefully manage associated costs through expense controls.
Intellectual Property
We seek to establish and maintain our proprietary rights in our
technology and products through the use of patents, copyrights, trademarks and trade secret laws. We also seek to maintain our trade secrets and confidential information by nondisclosure policies and through the use of appropriate confidentiality
agreements. We have obtained a number of patents and trademarks in the United States and in other countries. There can be no assurance, however, that these rights can be successfully enforced against competitive products in every jurisdiction.
Although we believe the protection afforded by our patents, copyrights, trademarks and trade secrets has value, the rapidly changing technology in the networking industry and uncertainties in the legal process make our future success dependent
primarily on the innovative skills, technological expertise, and management
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abilities of our employees rather than on the protection afforded by patent, copyright, trademark, and trade secret laws. In addition, we sold certain of our non-strategic patents for $1.1
million and $5.0 million in 2008 and 2007, respectively.
Many of our products are designed to include
software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe, based upon past experience and standard industry
practice, that such licenses generally could be obtained on commercially reasonable terms. Nonetheless, there can be no assurance that the necessary licenses would be available on acceptable terms, if at all. Our inability to obtain certain licenses
or other rights or to obtain such licenses or rights on favorable terms, or the need to engage in litigation regarding these matters, could have a material adverse effect on our business, operating results and financial condition.
The communications industry is characterized by rapidly changing technology, a large number of patents, and frequent claims
and related litigation regarding patent and other intellectual property rights. We cannot assure you that our patents and other proprietary rights will not be challenged, invalidated or circumvented, that others will not assert intellectual property
rights to technologies that are relevant to us, or that our rights will give us a competitive advantage. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States.
Sales and Marketing
We have a sales presence in various domestic and foreign locations, and we sell our products and services both directly and indirectly through channel partners with support from our sales force. Channel
partners include distributors, resellers, system integrators and service providers. These partners sell directly to end customers and often provide system installation, technical support, professional services and support services in addition to the
network equipment sale. Our sales efforts are generally organized according to geographical regions:
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U.S. Sales.
Our U.S. Sales organization establishes and maintains direct relationships with domestic customers, which include communication
service providers, cable operators, independent operating companies, or IOCs, as well as competitive carriers, developers and utilities. In addition, this organization is responsible for managing our distribution and original equipment manufacturer,
or OEM, partnerships.
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International Sales.
Our International Sales organization targets foreign based service providers and is staffed with individuals with
specific experience dealing with service providers in their designated international territories.
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Our marketing team works closely with our sales, research and product development organizations, and our customers by providing communications that keep the market current on our products and features. Marketing also identifies and sizes
new target markets for our products, creates awareness of our company and products, generates contacts and leads within these targeted markets and performs outbound education and public relations.
Backlog
Our backlog consists of purchase orders for products and services that we expect to ship or perform within the next year. At December 31, 2009, our backlog was $21.6 million, as compared to $4.2 million at December 31, 2008. We
consider backlog to be an indicator, but not the sole predictor, of future sales because our customers may cancel or defer orders without penalty.
Competition
We compete in the communications equipment market, providing products and services
for the delivery of voice, data and video services. This market is characterized by rapid change, converging technologies and a migration to solutions that offer superior advantages. These market factors represent both an opportunity and a
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competitive threat to us. We compete with numerous vendors, including Alcatel-Lucent, Calix, Huawei, and Occam Networks, among others. In addition, a number of companies have introduced products
that address the same network needs that our products address, both domestically and abroad. The overall number of our competitors may increase, and the identity and composition of competitors may change. As we continue to expand our sales globally,
we may see new competition in different geographic regions. Barriers to entry are relatively low, and new ventures to create products that do or could compete with our products are regularly formed. Many of our competitors have greater financial,
technical, sales and marketing resources than we do.
The principal competitive factors in the markets in
which we presently compete and may compete in the future include:
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interoperability with existing products;
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scalability and upgradeability;
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conformance to standards;
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ease of installation and use;
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geographic footprints for products;
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ability to provide customer financing;
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technical support and customer service; and
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While we believe that we compete successfully with respect to each of these factors, we expect to face intense competition in our market. In addition, the inherent nature of communications networking
requires interoperability. As such, we must cooperate and at the same time compete with many companies.
Manufacturing
We manufacture our products using a strategic combination of procurement from qualified suppliers, in-house manufacturing at
our facility in Florida, and the use of original design manufacturers (ODM) located in the Far East. Since our acquisition of Paradyne Networks, Inc., or Paradyne, in September 2005, we have been manufacturing a significant majority of our more
complex products at our manufacturing facility in Florida.
Our parts and components are procured from a
variety of qualified suppliers in the U.S., Far East, Mexico, and other countries around the world per our Approved Supplier List and detailed engineering specifications. Some completed products are procured to our specifications and shipped
directly to our customers. We also acquire completed products from certain suppliers and configure and ship from our facility. Some of these purchases are significant. We purchase both standard off-the-shelf parts and components, which are generally
available from more than one supplier, and single-source parts and components. We have generally been able to obtain adequate supplies to meet customer demand in a timely manner from our current vendors, or, when necessary, from alternate vendors.
We believe that alternate vendors can be identified if current vendors are unable to fulfill our needs, or design changes can be made to employ alternate parts.
We design, specify, and monitor all of the tests that are required to meet our internal and external quality standards. Our manufacturing and test engineers work closely with our
design engineers to ensure manufacturability and testability of our products, and to ensure that manufacturing and testing processes evolve as our technologies evolve. Our manufacturing engineers specify, build, or procure our test stations,
establish
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quality standards and protocols, and develop comprehensive test procedures and processes to assure the reliability and quality of our products. These processes and tests are reviewed by our
design engineers to ensure they meet the intent of the design. Products that are procured complete or partially complete are inspected, tested, and audited for quality control.
Our manufacturing quality system is ISO-9001 and is certified to ISO-9001 by our external registrar. ISO-9001 ensures our processes are documented, followed, and continuously
improved. Internal audits are conducted on a regular schedule by our quality assurance personnel, and external audits are conducted by our external registrar every six months. Our quality system is based upon our model for quality assurance in
design, development, production, installation, and service to ensure our products meet rigorous quality standards.
We believe that we have sufficient production capacity to meet current and future demand for our product offerings through a combination of existing and added capacity, additional employees, or the outsourcing of products or components.
Compliance with Regulatory and Industry Standards
Our products must comply with a significant number of voice and data regulations and standards which vary between the U.S. and international markets, and which vary between specific
international markets. Standards for new services continue to evolve, and we may need to modify our products or develop new versions to meet these standards. Standards setting and compliance verification in the U.S. are determined by the Federal
Communications Commission, or FCC, Underwriters Laboratories, Quality Management Institute, Telcordia Technologies, Inc., and other communications companies. In international markets, our products must comply with standards issued by the European
Telecommunications Standards Institute, or ETSI, and implemented and enforced by the telecommunications regulatory authorities of each nation.
Environmental Matters
Our operations and manufacturing processes are subject to federal,
state, local and foreign environmental protection laws and regulations. These laws and regulations relate to the use, handling, storage, discharge and disposal of certain hazardous materials and wastes, the pre-treatment and discharge of process
waste waters and the control of process air pollutants.
We believe that our operations and manufacturing
processes currently comply in all material respects with applicable environmental protection laws and regulations. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of
production or a prohibition on the sale of our products. In addition, such regulations could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesign of any
non-compliant product. From time to time new regulations are enacted, and it is difficult to anticipate how such regulations will be implemented and enforced. For example, in 2003 the European Union enacted the Restriction on the Use of Certain
Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states. We are aware of similar legislation that is
currently in force or is being considered in the United States, as well as other countries. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being liable for costs, fines, penalties and
third-party claims, and could jeopardize our ability to conduct business in countries in the jurisdictions where these regulations apply.
Employees
As of December 31, 2009, we employed 334 individuals worldwide. We consider the
relationships with our employees to be positive. Competition for technical personnel in our industry is intense. We believe that our future success depends in part on our continued ability to hire, assimilate and retain qualified personnel. To date,
we believe that we have been successful in recruiting qualified employees, but there is no assurance that we will continue to be successful in the future.
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Executive Officers
Set forth below is information concerning our executive officers and their ages as of December 31, 2009.
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Name
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Age
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Position
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Morteza Ejabat
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59
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Chief Executive Officer, President and Chairman of the Board of Directors
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Kirk Misaka
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51
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Chief Financial Officer, Corporate Treasurer and Secretary
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Morteza Ejabat
is a co-founder of Zhone and has served as Chairman of the Board of Directors, President and Chief Executive Officer since June 1999. Prior to co-founding Zhone, from June 1995 to
June 1999, Mr. Ejabat was President and Chief Executive Officer of Ascend Communications, Inc., a provider of telecommunications equipment which was acquired by Lucent Technologies, Inc. in June 1999. Previously, Mr. Ejabat held various
senior management positions with Ascend from September 1990 to June 1995, most recently as Executive Vice President and Vice President, Operations. Mr. Ejabat holds a B.S. in Industrial Engineering and an M.S. in Systems Engineering from
California State University at Northridge and an M.B.A. from Pepperdine University.
Kirk Misaka
has
served as Zhones Corporate Treasurer since November 2000 and as Chief Financial Officer and Secretary since July 2003. Prior to joining Zhone, Mr. Misaka was a Certified Public Accountant with KPMG LLP from 1980 to 2000, becoming a
partner in 1989. Mr. Misaka earned a B.S. and an M.S. in Accounting from the University of Utah, and an M.S. in Tax from Golden Gate University.
Recent Developments
As a result of Steven Levys resignation from our audit committee on
February 12, 2010, we became non-compliant with Nasdaqs audit committee requirements as set forth in Nasdaq Listing Rule 5605, which requires Nasdaq-listed companies to have an audit committee consisting of at least three independent
members. On March 2, 2010, we received a notice of deficiency from Nasdaq indicating that we no longer comply with the independent audit committee requirements for continued listing on The Nasdaq Capital Market. In accordance with Nasdaq
Listing Rule 5605, Nasdaq has requested that we provide evidence of compliance on or before the earlier of our next annual shareholders meeting or February 12, 2011 (or, if our next annual shareholders meeting is held before
August 11, 2010, then no later than August 11, 2010). We plan to conduct a thorough recruitment and evaluation process to find a suitable replacement for Mr. Levy prior to the end of this cure period.
Set forth below and elsewhere in this report and in other documents we file with the SEC are risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements
contained in this report.
Our future operating results are difficult to predict and our stock price may continue to be volatile.
As a result of a variety of factors discussed in this report, our revenues for a particular quarter are
difficult to predict. Our revenue and operating results may vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. The primary factors that may affect our results of operations include the
following:
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commercial acceptance of our SLMS products;
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fluctuations in demand for network access products;
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the timing and size of orders from customers;
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the ability of our customers to finance their purchase of our products as well as their own operations;
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new product introductions, enhancements or announcements by our competitors;
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our ability to develop, introduce and ship new products and product enhancements that meet customer requirements in a timely manner;
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changes in our pricing policies or the pricing policies of our competitors;
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the ability of our company and our contract manufacturers to attain and maintain production volumes and quality levels for our products;
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our ability to obtain sufficient supplies of sole or limited source components;
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increases in the prices of the components we purchase, or quality problems associated with these components;
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unanticipated changes in regulatory requirements which may require us to redesign portions of our products;
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changes in accounting rules, such as recording expenses for employee stock option grants;
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integrating and operating any acquired businesses;
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our ability to achieve targeted cost reductions;
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how well we execute on our strategy and operating plans; and
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general economic conditions as well as those specific to the communications, internet and related industries.
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Any of the foregoing factors, or any other factors discussed elsewhere herein, could have a material adverse effect on our
business, results of operations, and financial condition that could adversely affect our stock price. In addition, public stock markets have experienced, and may in the future experience, extreme price and trading volume volatility, particularly in
the technology sectors of the market. This volatility has significantly affected the market prices of securities of many technology companies for reasons frequently unrelated to or disproportionately impacted by the operating performance of these
companies. These broad market fluctuations may adversely affect the market price of our common stock. In addition, if our average market capitalization falls below the carrying value of our assets for an extended period of time such as in 2008 and
2009, this may indicate that the fair value of our net assets is below their carrying value, and may result in recording impairment charges.
We have incurred significant losses to date and expect that we may continue to incur losses in the foreseeable future. If we fail to generate sufficient revenue to achieve or sustain profitability, our
stock price could decline.
We have incurred significant losses to date and expect that we may continue to
incur losses in the foreseeable future. Our net losses for 2009 and 2008 were $10.0 million and $92.5 million, respectively, and we had an accumulated deficit of $1,015.6 million at December 31, 2009. We have significant fixed expenses and
expect that we will continue to incur substantial manufacturing, research and product development, sales and marketing, customer support, administrative and other expenses in connection with the ongoing development of our business. In addition, we
may be required to spend more on research and product development than originally budgeted to respond to industry trends. We may also incur significant new costs related to acquisitions and the integration of new technologies and other acquisitions
that may occur in the future. We may not be able to adequately control costs and expenses or achieve or maintain adequate operating margins. As a result, our ability to achieve and sustain profitability will depend on our ability to generate and
sustain substantially higher revenue while maintaining reasonable cost and expense levels. If we fail to generate sufficient revenue to achieve or sustain profitability, we will continue to incur substantial operating losses and our stock price
could decline.
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We have significant debt obligations, which could adversely affect our business,
operating results and financial condition.
As of December 31, 2009, we had approximately $28.7
million of total debt, of which $10.4 million was current and $18.3 million was long-term. Our debt obligations could materially and adversely affect us in a number of ways, including:
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limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or general corporate
purposes;
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limiting our flexibility to plan for, or react to, changes in our business or market conditions;
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requiring us to use a significant portion of any future cash flow from operations to repay or service the debt, thereby reducing the amount of cash
available for other purposes;
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making us more highly leveraged than some of our competitors, which may place us at a competitive disadvantage; and
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making us more vulnerable to the impact of adverse economic and industry conditions and increases in interest rates.
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We cannot assure you that we will be able to generate sufficient cash flow in amounts sufficient to enable us to service
our debt or to meet our working capital and capital expenditure requirements. If we are unable to generate sufficient cash flow from operations or to borrow sufficient funds to service our debt, due to borrowing base restrictions or otherwise, we
may be required to sell assets, reduce capital expenditures or obtain additional financing. We cannot assure you that we will be able to engage in any of these actions on reasonable terms, if at all.
If we are unable to obtain additional capital to fund our existing and future operations, we may be required to reduce the scope of our
planned product development, and marketing and sales efforts, which would harm our business, financial condition and results of operations.
The development and marketing of new products, and the expansion of our direct sales operations and associated support personnel requires a significant commitment of resources. We may continue to incur
significant operating losses or expend significant amounts of capital if:
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the market for our products develops more slowly than anticipated;
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we fail to establish market share or generate revenue at anticipated levels;
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our capital expenditure forecasts change or prove inaccurate; or
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we fail to respond to unforeseen challenges or take advantage of unanticipated opportunities.
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As a result, we may need to raise substantial additional capital. Additional capital, if required, may not be available on
acceptable terms, or at all. For example, U.S. credit markets have recently experienced significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen considerably. These circumstances have
materially impacted liquidity in debt markets, making financing terms for borrowers less attractive and resulting in the general unavailability of many forms of debt financing. Continued uncertainty in credit markets may negatively impact our
ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include
covenants, restrictions and financial ratios that may restrict our ability to operate our business. The recent events in the U.S. credit markets have also had an adverse effect on other U.S. financial markets and have adversely affected the trading
prices of equity securities of many U.S. companies, including Zhone, which may make it more difficult or costly for us to raise capital through the issuance of common stock, preferred stock or other equity securities. If we elect to raise equity
capital, this may be dilutive to existing stockholders and could reduce the trading price of our
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common stock. If we are unable to obtain additional capital or are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our
planned product development and sales and marketing efforts beyond the reductions that we have previously taken, which could have a material adverse effect on our business, financial condition and results of operations.
Our lack of liquid funds and other sources of financing may limit our ability to maintain our existing operations, grow our business and
compete effectively.
Our continued losses reduced our cash, cash equivalents and short-term investments in
2008 and 2009. As of December 31, 2009, we had approximately $21.8 million in cash, cash equivalents and short-term investments and $10.0 million outstanding under our bank lending facility. In order to meet our liquidity needs and finance our
capital expenditures and working capital needs for our business, we may be required to sell assets, or to borrow on potentially unfavorable terms. We may be unable to sell assets, or access additional indebtedness to meet these needs. As a result,
we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. Our current lack of liquidity could harm us by:
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increasing our vulnerability to adverse economic conditions in our industry or the economy in general;
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requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;
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limiting our ability to plan for, or react to, changes in our business and industry; and
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influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire customers.
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The recent downturn in the equity and debt markets generally may make it more difficult for
us to obtain financing through the issuance of equity or debt securities in the capital markets. We cannot be certain that additional financing, if needed, will be available on acceptable terms or at all. If we cannot raise any necessary additional
financing on acceptable terms, we may not be able to fund our business expansion, take advantage of future opportunities, meet our existing debt obligations or respond to competitive pressures or unanticipated capital requirements, any of which
could have a material adverse effect on our business, financial condition and results of operations. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have
rights, preference or privileges senior to those of existing holders of our common stock.
We face a number of risks
related to unfavorable economic and market conditions and severe tightening in the global credit markets.
Global market and economic conditions over the past two years have been unprecedented and challenging, with most major economies experiencing tighter credit conditions and an economic recession. Continued concerns about the systemic impact
of potential long-term and widespread recession, energy costs, geopolitical issues, the availability and cost of credit, and the global housing and mortgage markets have contributed to increased market volatility and diminished expectations for
western and emerging economies. In the second half of 2008 and during 2009, federal government interventions in the U.S. financial system led to increased market uncertainty and instability in both U.S. and international capital and credit markets.
These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have contributed to volatility of unprecedented levels. Continued unfavorable economic and market conditions globally could
impact our business in a number of ways, including:
Potential deferment of purchases and orders by customers
:
Uncertainty about current and future global economic conditions may cause consumers, businesses and governments to defer purchases in response to significant decreases in their revenues, tighter credit, decreased cash availability and declining
consumer confidence. Accordingly, future demand for our products could differ materially from our current expectations.
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Customers inability to obtain financing to make purchases from Zhone and/or
maintain their business:
Some of our customers require substantial financing in order to finance their business operations, including capital expenditures on new equipment and equipment upgrades, and make purchases from Zhone. The inability of
these customers to access the capital needed to finance purchases of our products and meet their payment obligations to us could adversely impact our financial condition and results of operations. If the financial crisis results in insolvencies for
our customers, it could have a material adverse impact on our business, financial condition and results of operations.
Negative impact from increased financial pressures on third-party dealers, distributors and retailers
: We make sales in certain regions through third-party dealers, distributors and retailers. These third parties may be impacted by
the significant decrease in available credit that has resulted from the current financial crisis. If credit pressures or other financial difficulties result in insolvency for these third parties and we are unable to successfully transition end
customers to purchase our products from other third parties, or from us directly, it could adversely impact our financial condition and results of operations.
Negative impact from increased financial pressures on key suppliers:
Our ability to meet customers demands depends, in part, on our ability to obtain timely and adequate delivery of quality
materials, parts and components from our suppliers. Certain of our components are available only from a single source or limited sources. If certain key suppliers were to become capacity constrained or insolvent as a result of the financial crisis,
it could result in a reduction or interruption in supplies or a significant increase in the price of supplies and adversely impact our financial condition and results of operations. In addition, credit constraints of key suppliers could result in
accelerated payment of accounts payable by Zhone, impacting our cash flow.
If the economic, market and
geopolitical conditions in the United States and the rest of the world do not improve, or if they continue to deteriorate, we may experience material adverse impacts on our business, operating results and financial condition.
Our common stock may be delisted from The Nasdaq Capital Market, which could negatively impact the price of our common stock and our
ability to access the capital markets.
On June 11, 2008, we received a letter from The Nasdaq Stock
Market, or Nasdaq, indicating that, for the last 30 consecutive business days preceding the date of the letter, the bid price of our common stock had closed below the $1.00 minimum per share bid price required for continued inclusion on The Nasdaq
Global Market under Marketplace Rule 4450(a)(5). In accordance with Marketplace Rule 4450(e)(2), we were given 180 calendar days from the date of the Nasdaq letter, or until December 8, 2008, to regain compliance with the minimum bid price
rule. Nasdaq extended the temporary suspension of the minimum bid price rule on several occasions, and on July 13, 2009, we received a letter from Nasdaq indicating that the suspension of the rule would continue through September 25, 2009.
On September 10, 2009, we voluntarily filed a transfer application to transfer the listing of our common stock from The Nasdaq Global Market to The Nasdaq Capital Market. Nasdaq approved the transfer application on September 23, 2009, and
the transfer became effective at the opening of the market on September 28, 2009. Companies listed on The Nasdaq Capital Market must meet certain financial requirements and adhere to Nasdaqs corporate governance standards. As of the date
of our transfer application, we met the financial requirements and other criteria for continued listing on The Nasdaq Capital Market, except for the $1.00 minimum per share bid price requirement. As a result of the listing transfer, Nasdaq granted
us an additional 180-day period until March 29, 2010 to comply with the minimum bid price rule.
Our
stock price has not closed above $1.00 since the date of the receipt of the original letter from Nasdaq. On March 11, 2010, we filed a Certificate of Amendment with the Delaware Secretary of State to amend our Certificate of Incorporation to
effect a reverse stock split at an exchange ratio of one-for-five, which we effected in order to gain compliance with Nasdaqs $1.00 minimum per share bid price requirement. To regain compliance, however, the closing bid price of our
common stock must be at or above $1.00 per share for a
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minimum of 10 consecutive business days. Nasdaq may, in its discretion, require us to maintain a bid price for a period in excess of 10 consecutive business days, but generally no more than 20
consecutive business days, before determining that we have demonstrated an ability to maintain long-term compliance. While this reverse stock split is intended to increase the trading price of the common stock above the $1.00 minimum bid price,
there can be no assurance that the market price per post-split share will exceed or remain in excess of the minimum for a sufficient period of time to enable us to timely regain compliance with Nasdaq rules. If Nasdaq is not satisfied with the
trading price of our common stock as of March 29, 2010, Nasdaq may provide written notification to us that our common stock will be delisted. If that were to occur, we may appeal Nasdaqs delisting determination to a Nasdaq Listing
Qualification Panel.
The long-term efficacy of the reverse stock split in maintaining compliance with
Nasdaqs minimum bid price requirement is uncertain. While the short-term result of a reverse stock split can be reasonably predicted, the long-term consequences are more difficult to determine. The price of our common stock will
likely be affected by our performance and by general market and economic conditions that cannot be predicted or evaluated by the Board of Directors at this time. Accordingly, even if the reverse stock split is successful in regaining compliance
with Nasdaqs minimum bid price requirement by the March 29, 2010 deadline and we meet the financial requirements and other criteria needed to maintain our Nasdaq listing, there can be no assurance that the aggregate market value of our
common stock will be the same or greater after the reverse stock split than it would have been without ever effecting a reverse stock split.
On March 2, 2010, we received a further notice of deficiency from Nasdaq indicating that we no longer comply with the independent audit committee requirements for continued listing on The Nasdaq
Capital Market. Specifically, Nasdaq Listing Rule 5605 requires that the audit committee be comprised of at least three independent directors. On February 12, 2010, Steven Levy resigned from Zhones Board of Directors. The resignation
reduced the audit committee from three independent directors to two, resulting in non-compliance with Nasdaqs audit committee requirement. In accordance with Nasdaq Listing Rule 5605, Nasdaq has requested that we provide evidence of compliance
on or before the earlier of our next annual shareholders meeting or February 12, 2011 (or, if our next annual shareholders meeting is held before August 11, 2010, then no later than August 11, 2010). We plan to conduct a
thorough recruitment and evaluation process to find a suitable replacement for Mr. Levy prior to the end of this cure period. In the event we do not regain compliance with Nasdaqs audit committee requirements prior to the end of the cure
period, Nasdaq will provide written notice to us that our common stock will be delisted. If that were to occur, we may appeal Nasdaqs delisting determination to a Nasdaq Listing Qualification Panel.
Delisting from The Nasdaq Capital Market could have an adverse effect on our business and on the trading of our common
stock. If a delisting of our common stock were to occur, our common stock would trade on the OTC Bulletin Board or on the pink sheets maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less
efficient markets, and our stock price, as well as the liquidity of our common stock, may be adversely impacted as a result. Delisting from The Nasdaq Capital Market could also have other negative results, including the potential loss of confidence
by suppliers and employees, the loss of institutional investor interest and fewer business development opportunities.
If
demand for our SLMS products does not develop, then our results of operations and financial condition will be adversely affected.
Our future revenue depends significantly on our ability to successfully develop, enhance and market our SLMS products to the network service provider market. Most network service providers have made
substantial investments in their current infrastructure, and they may elect to remain with their current architectures or to adopt new architectures, such as SLMS, in limited stages or over extended periods of time. A decision by a customer to
purchase our SLMS products will involve a significant capital investment. We must convince our service provider customers that they will achieve substantial benefits by deploying our products for future
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upgrades or expansions. We do not know whether a viable market for our SLMS products will develop or be sustainable. If this market does not develop or develops more slowly than we expect, our
business, financial condition and results of operations will be seriously harmed.
We depend upon the development of new
products and enhancements to existing products, and if we fail to predict and respond to emerging technological trends and customers changing needs, our operating results and market share may suffer.
The markets for our products are characterized by rapidly changing technology, evolving industry standards, changes in
end-user requirements, frequent new product introductions and changes in communications offerings from network service provider customers. Our future success depends on our ability to anticipate or adapt to such changes and to offer, on a timely and
cost-effective basis, products that meet changing customer demands and industry standards. We may not have sufficient resources to successfully and accurately anticipate customers changing needs and technological trends, manage long
development cycles or develop, introduce and market new products and enhancements. The process of developing new technology is complex and uncertain, and if we fail to develop new products or enhancements to existing products on a timely and
cost-effective basis, or if our new products or enhancements fail to achieve market acceptance, our business, financial condition and results of operations would be materially adversely affected.
Because our products are complex and are deployed in complex environments, our products may have defects that we discover only after full
deployment by our customers, which could seriously harm our business.
We produce highly complex products
that incorporate leading-edge technology, including both hardware and software. Software typically contains defects or programming flaws that can unexpectedly interfere with expected operations. In addition, our products are complex and are designed
to be deployed in large quantities across complex networks. Because of the nature of these products, they can only be fully tested when completely deployed in large networks with high amounts of traffic, and there is no assurance that our
pre-shipment testing programs will be adequate to detect all defects. As a result, our customers may discover errors or defects in our hardware or software, or our products may not operate as expected, after they have been fully deployed by our
customers. If we are unable to cure a product defect, we could experience damage to our reputation, reduced customer satisfaction, loss of existing customers and failure to attract new customers, failure to achieve market acceptance, reduced sales
opportunities, loss of revenue and market share, increased service and warranty costs, diversion of development resources, legal actions by our customers, and increased insurance costs. Defects, integration issues or other performance problems in
our products could also result in financial or other damages to our customers. Our customers could seek damages for related losses from us, which could seriously harm our business, financial condition and results of operations. A product liability
claim brought against us, even if unsuccessful, would likely be time consuming and costly. The occurrence of any of these problems would seriously harm our business, financial condition and results of operations.
A shortage of adequate component supply or manufacturing capacity could increase our costs or cause a delay in our ability to fulfill
orders, and our failure to estimate customer demand properly may result in excess or obsolete component inventories that could adversely affect our gross margins.
Occasionally, we may experience a supply shortage, or a delay in receiving, certain component parts as a result of strong demand for the component parts and/or capacity constraints
or other problems experienced by suppliers. If shortages or delays persist, the price of these components may increase, or the components may not be available at all, and we may also encounter shortages if we do not accurately anticipate our needs.
Conversely, we may not be able to secure enough components at reasonable prices or of acceptable quality to build new products in a timely manner in the quantities or configurations needed. Accordingly, our revenue and gross margins could suffer
until other sources can be developed. Our operating results would also be adversely affected if, anticipating greater demand than actually develops, we commit to the purchase of more components than we
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need. Furthermore, as a result of binding price or purchase commitments with suppliers, we may be obligated to purchase components at prices that are higher than those available in the current
market. In the event that we become committed to purchase components at prices in excess of the current market price when the components are actually used, our gross margins could decrease.
We rely on contract manufacturers for a portion of our manufacturing requirements.
We rely on contract manufacturers to perform a portion of the manufacturing operations for our products. These contract manufacturers build product for other companies, including our
competitors. In addition, we do not have contracts in place with some of these providers and may not be able to effectively manage those relationships. We cannot be certain that our contract manufacturers will be able to fill our orders in a timely
manner. We face a number of risks associated with this dependence on contract manufacturers including reduced control over delivery schedules, the potential lack of adequate capacity during periods of excess demand, poor manufacturing yields and
high costs, quality assurance, increases in prices, and the potential misappropriation of our intellectual property. We have experienced in the past, and may experience in the future, problems with our contract manufacturers, such as inferior
quality, insufficient quantities and late delivery of products.
We depend on a limited source of suppliers for several key
components. If we are unable to obtain these components on a timely basis, we will be unable to meet our customers product delivery requirements, which would harm our business.
We currently purchase several key components from a limited number of suppliers. If any of our limited source of suppliers
become insolvent, cease business or experience capacity constraints, work stoppages or any other reduction or disruption in output, they may be unable to meet our delivery schedules. Our suppliers may enter into exclusive arrangements with our
competitors, be acquired by our competitors, stop selling their products or components to us at commercially reasonable prices, refuse to sell their products or components to us at any price or be unable to obtain or have difficulty obtaining
components for their products from their suppliers. If we do not receive critical components from our limited source of suppliers in a timely manner, we will be unable to meet our customers product delivery requirements. Any failure to meet a
customers delivery requirements could materially adversely affect our business, operating results and financial condition and could materially damage customer relationships.
Our target customer base is concentrated, and the loss of one or more of our customers could harm our business.
The target customers for our products are network service providers that operate voice, data and video communications
networks. There are a limited number of potential customers in our target market. During 2009, Emirates Telecommunications Corporation accounted for 19% of net revenue and we expect that a significant portion of our future revenue will depend on
sales of our products to a limited number of customers. Any failure of one or more customers to purchase products from us for any reason, including any downturn in their businesses, would seriously harm our business, financial condition and results
of operations.
Industry consolidation may lead to increased competition and may harm our operating results.
There has been a trend toward industry consolidation in the communications equipment market for several
years. We expect this trend to continue as companies attempt to strengthen or hold their market positions in an evolving industry and as companies are acquired or are unable to continue operations. We believe that industry consolidation may result
in stronger competitors that are better able to compete as sole-source vendors for customers. This could have a material adverse effect on our business, financial condition and results of operations. Furthermore, rapid consolidation could result in
a decrease in the number of customers we serve. Loss of a major customer could have a material adverse effect on our business, financial condition and results of operations.
20
We are exposed to the credit risk of some of our customers and to credit exposures in
weakened markets, which could result in material losses.
The current financial crisis, industry and
economic conditions have weakened the financial position of some of our customers and their ability to access capital to finance their business operations, including capital expenditures. To sell to some of these customers, we may be required to
assume incremental risks of uncollectible accounts or to extend credit or credit support. While we monitor these situations carefully and attempt to take appropriate measures to protect ourselves, including factoring credit arrangements to financial
institutions, it is possible that we may have to defer revenue until cash is collected or write-down or write-off uncollectible accounts. Such write-downs or write-offs, if large, could have a material adverse effect on our results of operations and
financial condition.
The market we serve is highly competitive and we may not be able to compete successfully.
Competition in the communications equipment market is intense. This market is characterized by rapid
change, converging technologies and a migration to networking solutions that offer superior advantages. We are aware of many companies in related markets that address particular aspects of the features and functions that our products provide.
Currently, our primary competitors include Alcatel-Lucent, Calix, Huawei, and Occam Networks, among others. We also may face competition from other large communications equipment companies or other companies that may enter our market in the future.
In addition, a number of companies have introduced products that address the same network needs that our products address, both domestically and abroad. Many of our competitors have longer operating histories, greater name recognition, larger
customer bases and greater financial, technical, sales and marketing resources than we do and may be able to undertake more extensive marketing efforts, adopt more aggressive pricing policies and provide more customer financing than we can. In
particular, we are encountering price-focused competitors from Asia, especially China, which places pressure on us to reduce our prices. If our competitors offer deep discounts on certain products, we may need to lower prices or offer other
favorable terms in order to compete successfully. Moreover, our competitors may foresee the course of market developments more accurately than we do and could develop new technologies that render our products less valuable or obsolete.
In our markets, principal competitive factors include:
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interoperability with existing products;
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scalability and upgradeability;
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conformance to standards;
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ease of installation and use;
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geographic footprints for products;
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ability to provide customer financing;
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technical support and customer service; and
|
If we are unable to compete successfully against our current and future competitors, we may have difficulty obtaining or retaining customers, and we could experience price reductions, order cancellations,
increased expenses and reduced gross margins, any of which could have a material adverse effect on our business, financial condition and results of operations.
21
Our success largely depends on our ability to retain and recruit key personnel, and any
failure to do so would harm our ability to meet key objectives.
Our future success depends upon the
continued services of our executive officers and our ability to identify, attract and retain highly skilled technical, managerial, sales and marketing personnel who have critical industry experience and relationships that we rely on to build our
business, including Morteza Ejabat, our co-founder, Chairman, President and Chief Executive Officer, and Kirk Misaka, our Chief Financial Officer. The loss of the services of any of our key employees, including Messrs. Ejabat and Misaka, could delay
the development and production of our products and negatively impact our ability to maintain customer relationships, which would harm our business, financial condition and results of operations.
Any strategic acquisitions or investments we make could disrupt our operations and harm our operating results.
As of December 31, 2009, we had acquired twelve companies or product lines since we were founded in 1999. Further, we
may acquire additional businesses, products or technologies in the future. On an ongoing basis, we may evaluate acquisitions of, or investments in, complementary companies, products or technologies to supplement our internal growth. Also, in the
future, we may encounter difficulties identifying and acquiring suitable acquisition candidates on reasonable terms.
If we do complete future acquisitions, we could:
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issue stock that would dilute our current stockholders percentage ownership;
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consume a substantial portion of our cash resources;
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incur substantial debt;
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increase our ongoing operating expenses and level of fixed costs;
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record goodwill and non-amortizable intangible assets that will be subject to impairment testing and potential periodic impairment charges;
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incur amortization expenses related to certain intangible assets;
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incur large and immediate write-offs; and
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become subject to litigation.
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Any acquisitions or investments that we make in the future will involve numerous risks, including:
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difficulties in integrating the operations, technologies, products and personnel of the acquired companies;
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diversion of managements time and attention away from normal daily operations of the business and the challenges of managing larger and more
widespread operations resulting from acquisitions;
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difficulties in entering markets in which we have no or limited prior experience;
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insufficient revenues to offset increased expenses associated with acquisitions and where competitors in such markets have stronger market
positions; and
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potential loss of key employees, customers, distributors, vendors and other business partners of the companies we acquire following and continuing
after announcement of acquisition plans.
|
Mergers and acquisitions of high-technology
companies are inherently risky and subject to many factors outside of our control, and we cannot be certain that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results or
financial condition. We do not know
22
whether we will be able to successfully integrate the businesses, products, technologies or personnel that we might acquire in the future or that any strategic investments we make will meet our
financial or other investment objectives. Any failure to do so could seriously harm our business, financial condition and results of operations.
Sales to communications service providers are especially volatile, and weakness in sales orders from this industry may harm our operating results and financial condition.
Sales activity in the service provider industry depends upon the stage of completion of expanding network infrastructures,
the availability of funding, and the extent to which service providers are affected by regulatory, economic and business conditions in the country of operations. Although some service providers may be increasing capital expenditures over the
depressed levels that have prevailed over the last few years, weakness in orders from this industry could have a material adverse effect on our business, operating results and financial condition. Slowdowns in the general economy, overcapacity,
changes in the service provider market, regulatory developments and constraints on capital availability have had a material adverse effect on many of our service provider customers, with many of these customers going out of business or substantially
reducing their expansion plans. These conditions have materially harmed our business and operating results, and we expect that some or all of these conditions may continue for the foreseeable future. Finally, service provider customers typically
have longer implementation cycles; require a broader range of service including design services; demand that vendors take on a larger share of risks; often require acceptance provisions, which can lead to a delay in revenue recognition; and expect
financing from vendors. All these factors can add further risk to business conducted with service providers.
Decreased
effectiveness of share-based compensation could adversely affect our ability to attract and retain employees.
We have historically used stock options as a key component of our employee compensation program in order to align the interests of our employees with the interests of our stockholders, encourage employee retention and provide competitive
compensation and benefit packages. If the trading price of our common stock declines, this would reduce the value of our share-based compensation to our present employees and could affect our ability to retain them. In addition, in recent periods,
some of our employee stock options have had exercise prices in excess of our stock price, which reduces their value to employees and could affect our ability to retain present, or attract prospective employees. To address these issues, in the fourth
quarter of 2008, we conducted an exchange offer, or the Exchange Offer, in which eligible employees, officers and directors of Zhone could exchange outstanding options to purchase shares of Zhone common stock previously granted under our equity
incentive compensation plans with an exercise price per share equal to or greater than $1.75 on a one-for-one basis for the grant of new options to purchase shares of Zhone common stock. Options to acquire approximately 2.9 million shares of
Zhone common stock were tendered in the Exchange Offer for new options with an exercise price of $0.50 per share, as adjusted for the one-for-five reverse stock split effected on March 11, 2010. Difficulties relating to obtaining stockholder
approval of equity compensation plans could also make it harder or more expensive for us to grant share-based payments to employees in the future.
Due to the international nature of our business, political or economic changes or other factors in a specific country or region could harm our future revenue, costs and expenses and financial
condition.
We currently have international operations consisting of sales and technical support teams in
various locations around the world. We expect to continue expanding our international operations in the future. The successful management and expansion of our international operations requires significant human effort and the commitment of
substantial financial resources. Further, our international operations may be subject to certain risks and challenges that could harm our operating results, including:
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trade protection measures and other regulatory requirements which may affect our ability to import or export our products into or from various
countries;
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23
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political considerations that affect service provider and government spending patterns;
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differing technology standards or customer requirements;
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developing and customizing our products for foreign countries;
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fluctuations in currency exchange rates;
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longer accounts receivable collection cycles and financial instability of customers;
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difficulties and excessive costs for staffing and managing foreign operations;
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potentially adverse tax consequences; and
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changes in a countrys or regions political and economic conditions.
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Any of these factors could harm our existing international operations and business or impair our ability to continue
expanding into international markets.
Compliance or the failure to comply with current and future environmental
regulations could cause us significant expense.
We are subject to a variety of federal, state, local and
foreign environmental regulations. If we fail to comply with any present and future regulations, we could be subject to future liabilities, the suspension of production or a prohibition on the sale of our products. In addition, such regulations
could require us to incur other significant expenses to comply with environmental regulations, including expenses associated with the redesign of any non-compliant product. From time to time new regulations are enacted, and it is difficult to
anticipate how such regulations will be implemented and enforced. For example, in 2003 the European Union enacted the Restriction on the Use of Certain Hazardous Substances in Electrical and Electronic Equipment Directive (RoHS) and the Waste
Electrical and Electronic Equipment Directive (WEEE), for implementation in European Union member states. We are aware of similar legislation that is currently in force or is being considered in the United States, as well as other countries, such as
Japan and China. Our failure to comply with any of such regulatory requirements or contractual obligations could result in our being liable for costs, fines, penalties and third-party claims, and could jeopardize our ability to conduct business in
countries in the jurisdictions where these regulations apply.
Adverse resolution of litigation may harm our operating
results or financial condition.
We are a party to various lawsuits and claims in the normal course of our
business. Litigation can be expensive, lengthy, and disruptive to normal business operations. Moreover, the results of complex legal proceedings are difficult to predict. An unfavorable resolution of a particular lawsuit could have a material
adverse effect on our business, operating results and financial condition. For additional information regarding litigation in which we are involved, see Item 3, Legal Proceedings, contained in Part I of this report.
Our intellectual property rights may prove difficult to protect and enforce.
We generally rely on a combination of copyrights, patents, trademarks and trade secret laws and restrictions on disclosure to
protect our intellectual property rights. We also enter into confidentiality or license agreements with our employees, consultants and corporate partners, and control access to and distribution of our proprietary information. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our technology is difficult, and we do not know whether the steps we have taken will
prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as extensively as in the United States. We cannot assure you that our pending, or any future, patent applications
will be granted, that any existing or future patents will not be challenged, invalidated, or circumvented, or that any existing or future
24
patents will be enforceable. While we are not dependent on any individual patents, if we are unable to protect our proprietary rights, we may find ourselves at a competitive disadvantage to
others who need not incur the substantial expense, time and effort required to create the innovative products.
We may be
subject to intellectual property infringement claims that are costly and time consuming to defend and could limit our ability to use some technologies in the future.
Third parties have in the past and may in the future assert claims or initiate litigation related to patent, copyright, trademark and other intellectual property rights to
technologies and related standards that are relevant to us. The asserted claims or initiated litigation can include claims against us or our manufacturers, suppliers or customers alleging infringement of their proprietary rights with respect to our
existing or future products, or components of those products. We have received correspondence from companies claiming that many of our products are using technology covered by or related to the intellectual property rights of these companies and
inviting us to discuss licensing arrangements for the use of the technology. Regardless of the merit of these claims, intellectual property litigation can be time consuming and costly, and result in the diversion of technical and management
personnel. Any such litigation could force us to stop selling, incorporating or using our products that include the challenged intellectual property, or redesign those products that use the technology. In addition, if a party accuses us of
infringing upon its proprietary rights, we may have to enter into royalty or licensing agreements, which may not be available on terms acceptable to us, if at all. If we are unsuccessful in any such litigation, we could be subject to significant
liability for damages and loss of our proprietary rights. Any of these results could have a material adverse effect on our business, financial condition and results of operations.
We rely on the availability of third party licenses.
Many of our products are designed to include software or other intellectual property licensed from third parties. It may be necessary in the future to seek or renew licenses relating to various elements
of the technology used to develop these products. We cannot assure you that our existing and future third-party licenses will be available to us on commercially reasonable terms, if at all. Our inability to maintain or obtain any third-party license
required to sell or develop our products and product enhancements could require us to obtain substitute technology of lower quality or performance standards, or at greater cost.
The long and variable sales cycles for our products may cause revenue and operating results to vary significantly from quarter to quarter.
The target customers for our products have substantial and complex networks that they traditionally expand in large
increments on a periodic basis. Accordingly, our marketing efforts are focused primarily on prospective customers that may purchase our products as part of a large-scale network deployment. Our target customers typically require a lengthy
evaluation, testing and product qualification process. Throughout this process, we are often required to spend considerable time and incur significant expense educating and providing information to prospective customers about the uses and features
of our products. Even after a company makes the final decision to purchase our products, it may deploy our products over extended periods of time. The timing of deployment of our products varies widely, and depends on a number of factors, including
our customers skill sets, geographic density of potential subscribers, the degree of configuration and integration required to deploy our products, and our customers ability to finance their purchase of our products as well as their
operations. As a result of any of these factors, our revenue and operating results may vary significantly from quarter to quarter.
The communications industry is subject to government regulations, which could harm our business.
The FCC has jurisdiction over the entire communications industry in the United States and, as a result, our existing and future products and our customers products are subject to FCC rules and regulations. Changes to current FCC rules
and regulations and future FCC rules and regulations could negatively affect our business. The uncertainty associated with future FCC decisions may cause network service providers to delay decisions
25
regarding their capital expenditures for equipment for broadband services. In addition, international regulatory bodies establish standards that may govern our products in foreign markets.
Changes to or future domestic and international regulatory requirements could result in postponements or cancellations of customer orders for our products and services, which would harm our business, financial condition and results of operations.
Further, we cannot be certain that we will be successful in obtaining or maintaining regulatory approvals that may, in the future, be required to operate our business.
The ability of unaffiliated stockholders to influence key transactions, including changes of control, may be limited by significant insider ownership, provisions of our charter documents and provisions
of Delaware law.
At December 31, 2009, our executive officers, directors and entities affiliated with
them beneficially owned, in the aggregate, approximately 26% of our outstanding common stock. These stockholders, if acting together, will be able to influence substantially all matters requiring approval by our stockholders, including the election
of directors and the approval of mergers or other business combination transactions. Circumstances may arise in which the interests of these stockholders could conflict with the interests of our other stockholders. These stockholders could delay or
prevent a change in control of our company even if such a transaction would be beneficial to our other stockholders. In addition, provisions of our certificate of incorporation, bylaws and Delaware law could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to certain stockholders.
Our business and operations are especially
subject to the risks of earthquakes and other natural catastrophic events.
Our corporate headquarters,
including a significant portion of our research and development operations, are located in Northern California, a region known for seismic activity. Additionally, some of our facilities, including our manufacturing facilities, are located near
geographic areas that have experienced hurricanes in the past. A significant natural disaster, such as an earthquake, hurricane, fire, flood or other catastrophic event, could severely affect our ability to conduct normal business operations, and as
a result, our future operating results could be materially and adversely affected.
ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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None.
Our worldwide headquarters are located at our Oakland, California campus. In March 2001, we purchased the land and buildings in Oakland, California which we had previously leased under a synthetic lease agreement. As part of the financing
for the purchase, we granted a deed of trust on the property to the lender and were required to transfer the land and buildings to a new wholly-owned consolidated subsidiary, Zhone Technologies Campus, LLC, from which we currently lease the land and
buildings. We are the sole member and manager of Zhone Technologies Campus, LLC. Our lease for this facility will expire in March 2011. The Oakland campus consists of three buildings with an aggregate of approximately 180,000 square feet, and is
used for our executive offices, research and product development activities, and administrative and marketing activities.
In addition to our Oakland campus, we also lease facilities for manufacturing, research and development purposes at locations including Largo, Florida; Alpharetta, Georgia; Portsmouth, New Hampshire and
Westlake Village, California. We also maintain smaller offices to provide sales and customer support at various domestic and international locations. We believe that our existing facilities are suitable and adequate for our present purposes.
26
ITEM 3.
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LEGAL PROCEEDINGS
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Paradyne Matters
As a result of our acquisition of Paradyne, we became involved in
various legal proceedings, claims and litigation, including those identified below, relating to the operations of Paradyne prior to our acquisition of Paradyne.
A purported stockholder class action complaint was filed in December 2001 in the United States District Court in the Southern District of New York against Paradyne, Paradynes
then-current directors and executive officers, and each of the underwriters (the Underwriter Defendants) who participated in Paradynes initial public offering and follow-on offering (collectively, the Paradyne
Offerings). The complaint alleges that, in connection with the Paradyne Offerings, the Underwriter Defendants charged excessive commissions, inflated transaction fees not disclosed in the applicable registration statements and allocated shares
of the Paradyne Offerings to favored customers in exchange for purported promises by such customers to purchase additional shares in the aftermarket, thereby allegedly inflating the market price for the Paradyne Offerings. The complaint seeks
damages in an unspecified amount for the purported class for the losses suffered during the class period. This action has been consolidated with hundreds of other securities class actions commenced against more than 300 companies (collectively, the
Issuer Defendants) and approximately 40 investment banks in which the plaintiffs make substantially similar allegations as those made against Paradyne with respect to the initial public offerings and/or follow-on offerings at issue in
those other cases. All of these actions have been consolidated before Judge Shira Scheindlin under the caption
In re: Initial Public Offering Securities Litigation
(the IPO Actions).
In 2003, the Issuer Defendants participated in a global settlement among the plaintiffs and the insurance companies that
provided directors and officers insurance coverage to the Issuer Defendants (the Issuer Settlement). The Issuer Settlement agreements provided for the Issuer Defendants (including Paradyne) to be fully released and dismissed
from the IPO Actions. Under the terms of the Issuer Settlement agreements, Paradyne would not have been required to make any cash payment to the plaintiffs. Although the District Court preliminarily approved the Issuer Settlement, the preliminary
approval remained subject to a future final settlement order, after notice of settlement had been provided to class members and they had been afforded the opportunity to oppose or opt out of the settlement. However, before the District Court could
conduct its final settlement hearing, on December 5, 2006, the United States Court of Appeals for the Second Circuit (the Second Circuit) reversed an October 13, 2004 order of the District Court in which Judge Scheindlin had
granted class certification for six test cases in the IPO Actions. On April 4, 2007, the Second Circuit denied the plaintiffs petition for rehearing of the December 5, 2006 ruling. The District Court has since made clear
that the Issuer Settlement cannot be approved in its current form as a class action settlement in light of the Second Circuits December 5, 2006 ruling and has declined to schedule a final approval hearing with respect to the
Issuer Settlement for that reason.
In March 2009, counsel for the plaintiffs, for the Issuer Defendants and
for the insurance companies that provided directors and officers insurance to the Issuer Defendants restructured the Issuer Settlement and submitted the restructured Issuer Settlement to the District Court for approval.
In October 2009, the District Court approved the restructured Issuer Settlement submitted in March 2009. The restructured
Issuer Settlement agreement provides for the Issuer Defendants (including Paradyne) to be fully released and dismissed from the IPO Actions. Under the terms of the approved restructured Issuer Settlement agreement, Paradyne is not required to make
any cash payments to the plaintiffs.
Other Matters
We are subject to other legal proceedings, claims and litigation arising in the ordinary course of business. While the
outcome of these matters is currently not determinable, we do not expect that the ultimate costs to
27
resolve these matters will have a material adverse effect on our consolidated financial position or results of operations. However, litigation is subject to inherent uncertainties, and
unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling occurs, or future periods.
28
PART II
ITEM 5.
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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Price Range of Common Stock
Our common stock was listed on the Nasdaq Global Market under the symbol ZHNE until September 28, 2009, when our common stock was transferred to the Nasdaq Capital Market, where it is
also listed under the symbol ZHNE. The following table sets forth, for the periods indicated, the high and low per share sales prices of our common stock as reported on Nasdaq.
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2009:
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High
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Low
|
Fourth Quarter ended December 31, 2009
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$
|
3.80
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|
$
|
1.65
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Third Quarter ended September 30, 2009
|
|
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4.65
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|
|
1.30
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Second Quarter ended June 30, 2009
|
|
|
1.90
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|
|
0.90
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First Quarter ended March 31, 2009
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|
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1.10
|
|
|
0.40
|
|
|
|
2008:
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|
|
|
|
|
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|
High
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|
Low
|
Fourth Quarter ended December 31, 2008
|
|
$
|
1.40
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|
$
|
0.25
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Third Quarter ended September 30, 2008
|
|
|
3.80
|
|
|
0.80
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Second Quarter ended June 30, 2008
|
|
|
5.35
|
|
|
3.50
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First Quarter ended March 31, 2008
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|
|
6.10
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|
|
4.30
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All
per share prices reflect the one-for-five reverse stock split effected on March 11, 2010.
As of
December 31, 2009, there were 1,371 registered stockholders of record. A substantially greater number of holders of Zhone common stock are street name or beneficial holders, whose shares are held of record by banks, brokers and
other financial institutions.
Dividend Policy
We have never paid or declared any cash dividends on our common stock or other securities and do not anticipate paying cash dividends in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of the Board of Directors, subject to any applicable restrictions under our debt and credit agreements, and will be dependent upon our financial condition, results of operations, capital
requirements, general business condition and such other factors as the Board of Directors may deem relevant.
Recent Sales of Unregistered
Securities
There were no unregistered sales of equity securities during 2009.
29
ITEM 6.
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SELECTED FINANCIAL DATA
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The following selected financial data has been derived from our consolidated financial statements and should be read in conjunction with the consolidated financial statements and notes thereto, and with
Managements Discussion and Analysis of Financial Condition and Results of Operations. During the years ended December 31, 2009, 2008, 2007, 2006 and 2005, we recorded charges of zero, $70.4 million, zero, $113.7 million, and
$102.1 million, respectively, related to the impairment of acquisition related intangibles and goodwill as discussed in Note 3 to the consolidated financial statements.
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|
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As of December 31,
|
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|
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2009
|
|
|
2008
|
|
|
2007
|
|
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2006
|
|
|
2005
|
|
|
|
(in thousands, except per share data)
|
|
Statement of Operations Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
126,501
|
|
|
$
|
146,160
|
|
|
$
|
175,448
|
|
|
$
|
194,344
|
|
|
$
|
151,828
|
|
Cost of revenue (1)
|
|
|
81,106
|
|
|
|
101,096
|
|
|
|
116,370
|
|
|
|
131,749
|
|
|
|
88,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
45,395
|
|
|
|
45,064
|
|
|
|
59,078
|
|
|
|
62,595
|
|
|
|
62,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development (1)
|
|
|
22,113
|
|
|
|
27,063
|
|
|
|
32,720
|
|
|
|
36,099
|
|
|
|
27,062
|
|
Sales and marketing (1)
|
|
|
22,042
|
|
|
|
28,269
|
|
|
|
33,192
|
|
|
|
38,225
|
|
|
|
29,756
|
|
General and administrative (1)
|
|
|
9,933
|
|
|
|
15,609
|
|
|
|
10,170
|
|
|
|
14,036
|
|
|
|
14,534
|
|
Purchased in-process research and development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,190
|
|
Gain on sale of fixed assets
|
|
|
|
|
|
|
(455
|
)
|
|
|
(659
|
)
|
|
|
|
|
|
|
|
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(4,397
|
)
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,764
|
|
|
|
12,452
|
|
Impairment of intangible assets and goodwill
|
|
|
|
|
|
|
70,401
|
|
|
|
|
|
|
|
113,666
|
|
|
|
102,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,088
|
|
|
|
136,490
|
|
|
|
70,423
|
|
|
|
204,790
|
|
|
|
187,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8,693
|
)
|
|
|
(91,426
|
)
|
|
|
(11,345
|
)
|
|
|
(142,195
|
)
|
|
|
(124,230
|
)
|
Interest expense
|
|
|
(1,331
|
)
|
|
|
(1,625
|
)
|
|
|
(2,213
|
)
|
|
|
(2,774
|
)
|
|
|
(3,357
|
)
|
Interest income
|
|
|
47
|
|
|
|
708
|
|
|
|
1,813
|
|
|
|
2,328
|
|
|
|
1,433
|
|
Other income (expense), net
|
|
|
121
|
|
|
|
78
|
|
|
|
37
|
|
|
|
239
|
|
|
|
(522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,856
|
)
|
|
|
(92,265
|
)
|
|
|
(11,708
|
)
|
|
|
(142,402
|
)
|
|
|
(126,676
|
)
|
Income tax provision
|
|
|
171
|
|
|
|
270
|
|
|
|
394
|
|
|
|
264
|
|
|
|
215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,027
|
)
|
|
$
|
(92,535
|
)
|
|
$
|
(12,102
|
)
|
|
$
|
(142,666
|
)
|
|
$
|
(126,891
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share (2)
|
|
$
|
(0.33
|
)
|
|
$
|
(3.08
|
)
|
|
$
|
(0.40
|
)
|
|
$
|
(4.80
|
)
|
|
$
|
(5.66
|
)
|
Shares used in per-share calculation (2)
|
|
|
30,200
|
|
|
|
30,068
|
|
|
|
29,925
|
|
|
|
29,745
|
|
|
|
22,401
|
|
(1) Amounts include stock-based compensation cost as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
$
|
104
|
|
|
$
|
158
|
|
|
$
|
296
|
|
|
$
|
892
|
|
|
$
|
153
|
|
Research and product development
|
|
|
414
|
|
|
|
479
|
|
|
|
717
|
|
|
|
1,632
|
|
|
|
223
|
|
Sales and marketing
|
|
|
484
|
|
|
|
511
|
|
|
|
603
|
|
|
|
1,380
|
|
|
|
226
|
|
General and administrative
|
|
|
1,258
|
|
|
|
1,203
|
|
|
|
1,250
|
|
|
|
1,601
|
|
|
|
2,670
|
|
(2) All share and per share amounts reflect the one-for-five reverse stock split
effected on March 11, 2010.
|
|
|
|
|
|
As of December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
21,766
|
|
|
$
|
36,243
|
|
|
$
|
50,165
|
|
|
$
|
64,310
|
|
|
$
|
71,140
|
|
Working capital
|
|
|
53,843
|
|
|
|
62,007
|
|
|
|
77,496
|
|
|
|
83,872
|
|
|
|
102,521
|
|
Total assets
|
|
|
110,259
|
|
|
|
123,449
|
|
|
|
223,406
|
|
|
|
240,182
|
|
|
|
380,105
|
|
Long-term debt, including current portion
|
|
|
18,696
|
|
|
|
19,078
|
|
|
|
19,405
|
|
|
|
27,049
|
|
|
|
29,767
|
|
Stockholders equity
|
|
$
|
51,673
|
|
|
$
|
59,297
|
|
|
$
|
149,547
|
|
|
$
|
157,604
|
|
|
$
|
291,789
|
|
30
ITEM 7.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Overview
We
believe that we are the first company dedicated solely to developing the full spectrum of next-generation access network solutions to cost-effectively deliver high bandwidth services while simultaneously preserving the investment in todays
networks. Our next-generation solutions are based upon our Single Line Multi-Service, or SLMS, architecture. From its inception, this SLMS architecture was specifically designed for the delivery of multiple classes of subscriber services (such as
voice, data and video distribution), rather than being based on a particular protocol or media. In other words, our SLMS products are built to support the migration from legacy circuit to packet technologies and from copper to fiber technologies.
This flexibility and versatility allows our products to adapt to future technologies while allowing service providers to focus on the delivery of additional high bandwidth services. Because this SLMS architecture is designed to interoperate with
existing legacy equipment, service providers can leverage their existing networks to deliver a combination of voice, data and video services today, while they migrate, either simultaneously or at a future date, from legacy equipment to
next-generation equipment with minimal interruption. We believe that our SLMS solution provides an evolutionary path for service providers from their existing infrastructures, as well as gives newer service providers the capability to deploy
cost-effective, multi-service networks that can support voice, data and video.
Our global customer base
includes regional, national and international telecommunications carriers. To date, our products are deployed by over 700 network service providers on six continents worldwide. We believe that we have assembled the employee base, technological
breadth and market presence to provide a simple yet comprehensive set of next-generation solutions to the bandwidth bottleneck in the access network and the other problems encountered by network service providers when delivering communications
services to subscribers.
Since inception, we have incurred significant operating losses and had an
accumulated deficit of $1,015.6 million as of December 31, 2009.
Going forward, our key financial
objectives include the following:
|
|
|
Increasing revenue while continuing to carefully control costs;
|
|
|
|
Continued investments in strategic research and product development activities that will provide the maximum potential return on investment; and
|
|
|
|
Minimizing consumption of our cash and short-term investments.
|
Global market and economic conditions over the past two years have been unprecedented and challenging, with most major
economies experiencing tighter credit conditions and an economic recession. Continued concerns about the systemic impact of potential long-term and widespread recession, energy costs, geopolitical issues, the availability and cost of credit, and the
global housing and mortgage markets have contributed to increased market volatility and diminished expectations for western and emerging economies. In the second half of 2008 and during 2009, federal government interventions in the U.S. financial
system led to increased market uncertainty and instability in both U.S. and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment, have
contributed to volatility of unprecedented levels. Continued unfavorable economic and market conditions globally may result in an adverse effect on our financial condition and results of operations.
Sale of Legacy Inventory and Other Assets
In January 2008, we sold our GigaMux legacy product line to a third party. The sale of the GigaMux legacy product line was not treated as a discontinued operation since it did not represent a
component of the company that had operations and cash flows that were clearly distinguishable, operationally and for financial reporting
31
purposes, from the rest of the entity. We allocated the proceeds received to receivables, inventory, fixed assets and intangible assets based on the relative fair value of the assets sold. We
recognized a gain of $1.3 million on the sale of the inventory related to this product line in the first quarter of 2008 that was recorded in cost of revenue. We also recognized a gain of $0.5 million and $3.2 million on the sale of fixed assets and
intangible assets, respectively, in the first quarter of 2008 that was recorded as a component of operating expenses. We are entitled to additional contingent consideration for the sale of the GigaMux legacy product line upon the buyers usage
of inventory and/or attainment of certain performance targets through December 2010. Additional contingent consideration, if any, will be recorded upon receipt of cash as an additional gain in cost of revenue. During 2008, we received contingent
consideration of $1.1 million related to the buyers usage of inventory related to the GigaMux legacy product line. During 2009, we received additional contingent consideration of $0.4 million related to the buyers usage of inventory
related to the GigaMux legacy product line.
In December 2007, we sold inventory and certain assets related to
our Access Node legacy product line to a third party. The sale of the Access Node product line was not treated as a discontinued operation since it did not represent a component of our company that had operations and cash flows that were clearly
distinguishable, operationally and for financial reporting purposes, from the rest of the entity. Upon sale of the Access Node inventory, we recognized a gain of $1.7 million in 2007 that was recorded in cost of revenue. In 2008, we recognized an
additional gain of $0.2 million that was recorded in cost of revenue. During 2009, we recognized an additional gain of $0.2 million that was recorded in cost of revenue. We will continue to record additional gain in the future contingent upon
attainment of certain earnout provisions. In addition to the sale of the inventory, we also sold fixed assets related to the Access Node legacy product line, which resulted in a gain of $0.7 million in 2007 that was recorded as a component of
operating expenses.
During December 2006, we entered into an agreement to sell inventory and certain assets
related to our iMarc legacy product line to a third party. The sale of the iMarc legacy product line was not treated as a discontinued operation since it did not represent a component of the company that had operations and cash flows that were
clearly distinguishable, operationally and for financial reporting purposes, from the rest of the entity. Upon the performance of certain obligations and delivery of the assets in the first quarter of 2007, we recognized a gain of $1.8 million that
was recorded in cost of revenue. Upon the sale of the remaining iMarc inventory during the second quarter of 2007, we recognized an additional gain of $1.1 million that was recorded in cost of revenue.
Critical Accounting Policies and Estimates
Managements discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with generally
accepted accounting principles in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and
expenses, and related disclosure of contingent assets and liabilities. The policies discussed below are considered by management to be critical because changes in such estimates can materially affect the amount of our reported net income or loss.
For all of these policies, management cautions that actual results may differ materially from these estimates under different assumptions or conditions.
Revenue Recognition
We recognize revenue when the earnings
process is complete. We recognize product revenue upon shipment of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returns and allowances at the time of shipment.
Revenue is deferred if there are significant post-delivery obligations, if collection is not considered reasonably assured at the time of sale, or if the fees are not fixed or determinable. When significant post-delivery obligations exist, revenue
is deferred until such obligations are fulfilled. Our arrangements generally do not have any significant post-delivery obligations. If our
32
arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance certificate from the customer, unless we can objectively demonstrate that the
delivered products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining the signed acceptance certificate, we use
successful completion of customer testing as the basis to objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement. We also consider our historical acceptance experience with the
customer, as well as the payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. We offer products and services such as support, education and training, hardware upgrades and
post-warranty support. For multiple element revenue arrangements, we establish the fair value of these products and services based primarily on sales prices when the products and services are sold separately. If fair value cannot be established for
undelivered elements, all of the revenue under the arrangement is deferred until those elements have been delivered. When collectibility is not reasonably assured, revenue is recognized when cash is collected. Revenue from education services and
support services is recognized over the contract term or as the service is performed. We make certain sales to product distributors. These customers are given certain privileges to return a portion of inventory. Return privileges generally allow
distributors to return inventory based on a percent of purchases made within a specific period of time. We recognize revenue on sales to distributors that have contractual return rights when the products have been sold by the distributors, unless
there is sufficient customer specific sales and sales returns history to support revenue recognition upon shipment. In those instances when revenue is recognized upon shipment to distributors, we use historical rates of return from the distributors
to provide for estimated product returns. We accrue for warranty costs, sales returns and other allowances at the time of shipment based on historical experience and expected future costs.
Allowances for Sales Returns and Doubtful Accounts
We record an allowance for sales returns for estimated future product returns related to current period product revenue. The allowance for sales returns is recorded as a reduction of revenue and an
allowance against our accounts receivable. We base our allowance for sales returns on periodic assessments of historical trends in product return rates and current approved returned products. If the actual future returns were to deviate from the
historical data on which the reserve had been established, our future revenue could be adversely affected. We record an allowance for doubtful accounts for estimated losses resulting from the inability of customers to make payments for amounts owed
to us. The allowance for doubtful accounts is recorded as a charge to general and administrative expenses. We base our allowance on periodic assessments of our customers liquidity and financial condition through analysis of information
obtained from credit rating agencies, financial statement reviews and historical collection trends. Additional allowances may be required in the future if the liquidity or financial condition of our customers deteriorates, resulting in impairment in
their ability to make payments.
Valuation of Long-Lived Assets, Including Goodwill and Other Acquisition-Related Intangible Assets
Our long-lived assets have consisted primarily of goodwill, other acquisition-related intangible assets and
property and equipment. We review goodwill for impairment in November of each year, or more frequently if events or circumstances indicate the carrying value of an asset may not be recoverable. Such events or circumstances include, but are not
limited to, a significant decrease in the benefits realized from an acquired business, difficulty and delays in integrating an acquired business, a significant change in the operations of an acquired business, or significant negative economic
trends, such as stock price movements. We utilize a two-step impairment test with respect to goodwill. In the first step, we compare the fair value of each reporting unit to its carrying value. We have determined that we operate in a single segment
with one operating unit. We estimate the fair value of our reporting unit based on a combination of the market, income and replacement cost approaches. In the application of the impairment testing, we are required to make estimates of future
operating trends and resulting cash flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates. If the fair value of the reporting unit exceeds the carrying value,
goodwill is not impaired and we are not required to perform further testing. If the carrying value exceeds the fair
33
value of the reporting unit, then we must perform the second step of the impairment test in order to determine the implied fair value of the reporting unit. An impairment loss is recognized to
the extent that the carrying amount exceeds the implied fair value of the reporting unit.
During 2008, we
determined that indicators of impairment existed, resulting in an impairment charge to goodwill of $70.4 million. As of December 31, 2008, we had no remaining goodwill.
We review long-lived assets, including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset
may not be fully recoverable based on expected undiscounted cash flows attributable to that asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future net undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of
the asset.
At December 31, 2009, our long-lived assets consisted of $19.0 million of net property and
equipment.
Stock-Based Compensation
We estimate the fair value of stock-based payment awards on the date of grant using the Black Scholes pricing model, which is affected by our stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk free interest rate and expected dividends. The expected stock
price volatility is based on the weighted average of the historical volatility of our common stock over the most recent period commensurate with the estimated expected life of our stock options. We base our expected life assumption on our historical
experience and on the terms and conditions of the stock awards we grant to employees. Risk free interest rates reflect the yield on zero-coupon U.S. Treasury securities. We do not anticipate paying any cash dividends in the foreseeable future and
therefore use an expected dividend yield of zero.
If factors change, and we employ different assumptions for
estimating stock-based compensation expense in future periods, or if we decide to use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating
income, net loss and net loss per share. We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.
Fair value stock-based compensation expense for the year ended December 31, 2009 includes compensation expense for
share-based payment awards granted prior to, but not yet vested as of December 31, 2005 based on the grant date fair value estimated compensation expense for the share-based payment awards granted subsequent to December 31, 2005. Effective
January 1, 2006, we changed our method of attributing the value of stock-based compensation to expense from the accelerated method to the straight line method. Compensation expense for all employee share-based payment awards granted on or prior
to December 31, 2005 will continue to be recognized using the accelerated method while compensation expense for all share-based payment awards granted subsequent to December 31, 2005 is recognized using the straight line method.
In addition, stock-based compensation expense was recorded for options issued to non-employees. These options
are generally immediately exercisable and expire seven to ten years from the date of grant. We value non-employee options using the Black Scholes model. Non-employee options subject to vesting are valued as they become vested.
In November 2008, we completed the Exchange Offer to exchange certain stock options issued to eligible employees, officers
and directors of Zhone under Zhones equity incentive compensation plans. The primary
34
purpose of the Exchange Offer was to motivate, retain and reward talented employees and directors. Stock options previously granted that had an exercise price per share of equal to or greater
than $1.75 per share were eligible to be exchanged on a one-for-one basis for new stock options with an exercise price equal to the last reported sale price of Zhone common stock on The Nasdaq Global Market on the date of grant. Options for an
aggregate of 2.9 million shares of common stock were exchanged on November 17, 2008. The new stock options issued pursuant to the Exchange Offer have an exercise price of $0.50, vest over a four-year period with no credit for past vesting
and have a seven-year term. The Exchange Offer will result in incremental stock-based compensation of approximately $0.7 million to be recognized over the four-year vesting period. The remaining unrecognized compensation expense of the original
grant will be amortized over the original requisite service period.
Inventories
Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO)
method. In assessing the net realizable value of inventories, we are required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once inventory has been written down to its estimated
net realizable value, its carrying value cannot be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in forecasted demand occurs, or we experience a higher incidence of inventory obsolescence due to rapidly
changing technology and customer requirements, we may incur significant charges for excess inventory.
Operating Lease Liabilities
As a result of our acquisition of Paradyne in September 2005, we assumed certain lease liabilities for
facilities in Largo, Florida. We have accrued a liability for the excess portion of these facilities. The computation of the estimated liability includes a number of assumptions and subjective variables. These variables include the level and timing
of future sublease income, amount of contractual variable costs, future market rental rates, discount rate, and other estimated expenses. If circumstances change, and we employ different assumptions in future periods, the lease liability may differ
significantly from what we have recorded in the current period and could materially affect our net loss and net loss per share. During the second quarter of 2008, we increased the excess lease liability balance by $3.3 million with a corresponding
charge to general and administrative expenses. During 2009, we assumed that we would no longer be able to sublease the remaining excess space due to the continued deterioration in the real estate market. Accordingly, during 2009, we increased our
excess lease liability balance by $0.6 million, with a corresponding charge to general and administrative expenses.
35
RESULTS OF OPERATIONS
We list in the tables below the historical consolidated statement of operations as a percentage of revenue for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Cost of revenue
|
|
64
|
%
|
|
69
|
%
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
36
|
%
|
|
31
|
%
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and product development
|
|
18
|
%
|
|
19
|
%
|
|
19
|
%
|
Sales and marketing
|
|
17
|
%
|
|
19
|
%
|
|
19
|
%
|
General and administrative
|
|
8
|
%
|
|
11
|
%
|
|
6
|
%
|
Gain on sale of fixed assets
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
Gain on sale of intangible assets
|
|
0
|
%
|
|
(3
|
)%
|
|
(3
|
)%
|
Impairment of goodwill
|
|
0
|
%
|
|
48
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
43
|
%
|
|
94
|
%
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
(7
|
)%
|
|
(63
|
)%
|
|
(7
|
)%
|
Interest expense
|
|
(1
|
)%
|
|
(1
|
)%
|
|
(1
|
)%
|
Interest income
|
|
0
|
%
|
|
1
|
%
|
|
1
|
%
|
Other income
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
(8
|
)%
|
|
(63
|
)%
|
|
(7
|
)%
|
Income tax provision
|
|
0
|
%
|
|
0
|
%
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
(8
|
)%
|
|
(63
|
)%
|
|
(7
|
)%
|
|
|
|
|
|
|
|
|
|
|
2009 COMPARED WITH 2008
Net Revenue
Information about our net revenue for products
and services for 2009 and 2008 is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
|
%
change
|
|
Products
|
|
$
|
120.9
|
|
$
|
141.9
|
|
$
|
(21.0
|
)
|
|
(15
|
)%
|
Services
|
|
|
5.6
|
|
|
4.3
|
|
|
1.3
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126.5
|
|
$
|
146.2
|
|
$
|
(19.7
|
)
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36
Information about our net revenue for North America and international
markets for 2009 and 2008 is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
|
Increase
(Decrease)
|
|
|
%
change
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
50.1
|
|
$
|
60.8
|
|
$
|
(10.7
|
)
|
|
(18
|
)%
|
Canada
|
|
|
5.5
|
|
|
5.4
|
|
|
0.1
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
55.6
|
|
|
66.2
|
|
|
(10.6
|
)
|
|
(16
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
18.0
|
|
|
32.2
|
|
|
(14.2
|
)
|
|
(44
|
)%
|
Europe, Middle East, Africa
|
|
|
48.7
|
|
|
43.9
|
|
|
4.8
|
|
|
11
|
%
|
Asia Pacific
|
|
|
4.2
|
|
|
3.9
|
|
|
0.3
|
|
|
8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
70.9
|
|
|
80.0
|
|
|
(9.1
|
)
|
|
(11
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
126.5
|
|
$
|
146.2
|
|
$
|
(19.7
|
)
|
|
(13
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue decreased 13% or $19.7 million to $126.5 million for 2009 compared to
$146.2 million for 2008. The decrease in net revenue was attributable to a decrease in product revenue, which in 2009, decreased 15% or $21.0 million compared to 2008. The decrease was primarily due to the global recession and credit contraction
which caused many of our customers to defer or reduce their network expansion. Service revenue increased 30% or $1.3 million compared to 2008. Service revenue represents revenue from maintenance and other services associated with product shipments.
International revenue decreased 11% or $9.1 million to $70.9 million in 2009 and represented 56% of total
revenue compared with 55% in 2008. The decrease in international revenue was primarily due to lower demand in Latin America as a result of the global economic downturn and credit contraction. The decrease in Latin America was offset by an increase
in revenue in Europe, Middle East and Africa in 2009 due to increased sales of our new products. We experienced significant growth associated with one international customer (Etisalat) that accounted for 19% of net revenue in 2009.
During 2009, Etisalat accounted for 19% of net revenue and no customer accounted for 10% or more of net revenue in 2008. We
anticipate that our results of operations in any given period may depend to a large extent on sales to a small number of large accounts. As a result, our revenue for any quarter may be subject to significant volatility based upon changes in orders
from one or a small number of key customers.
Cost of Revenue and Gross Profit
Total cost of revenue, including stock-based compensation, decreased $20.0 million, or 20% to $81.1 million for 2009,
compared to $101.1 million for 2008. Total cost of revenue was 64% of net revenue for 2009, compared to 69% of net revenue for 2008, which resulted in an increase in gross profit percentage from 31% in 2008 to 36% in 2009. The increase in gross
profit percentage during 2009 was attributed to the change in product mix and decrease in personnel-related costs for 2009. Personnel related costs for 2009 decreased over 2008 by $3.3 million primarily due to headcount reductions and economies of
scale.
In December 2007, we sold inventory and certain assets related to our Access Node legacy product line
to a third party. The sale of the Access Node product line was not treated as a discontinued operation since it did not represent a component of our company that had operations and cash flows that were clearly distinguishable, operationally and for
financial reporting purposes, from the rest of the entity. Upon sale of the Access Node inventory, we recognized a gain of $1.7 million that was recorded in cost of revenue in 2007. In 2008 and 2009, we recognized additional gains of $0.2 million
and $0.2 million, respectively, which were recorded in cost of revenue. We will continue to record additional gain in the future contingent upon attainment of certain earnout provisions.
37
In January 2008, we sold inventory and certain assets related to our GigaMux
legacy product line to a third party. The sale of the GigaMux legacy product line was not treated as a discontinued operation since it did not represent a component of our company that had operations and cash flows that were clearly distinguishable,
operationally and for financial reporting purposes, from the rest of the entity. Upon sale of the GigaMux legacy product line, we recognized a gain of $1.3 million during the first quarter of 2008 that was recorded in cost of revenue. Additional
gains of $1.1 million and $0.4 million were recognized in 2008 and 2009, respectively, related to certain earnout provisions which were recorded in cost of revenue.
We expect that in the future, our cost of revenue as a percentage of net revenue will vary depending on the mix and average selling prices of products sold in the future. In
addition, continued competitive and economic pressures could cause us to reduce our prices, adjust the carrying values of our inventory, or record inventory charges relating to discontinued products and excess or obsolete inventory.
Research and Product Development Expenses
Research and product development expenses decreased 18% or $5.0 million to $22.1 million for 2009 compared to $27.1 million for 2008. The decrease was primarily due to restructuring efforts to streamline
processes, which reduced personnel-related costs by $3.1 million and prototype costs by $1.2 million. We intend to continue to invest in research and product development to attain our strategic product development objectives, while seeking to manage
the associated costs through expense controls.
Sales and Marketing Expenses
Sales and marketing expenses decreased 22% or $6.3 million to $22.0 million for 2009 compared to $28.3 million for 2008.
The decrease was primarily attributable to reductions in personnel-related costs of $1.8 million from lower headcount as we realigned our resources to focus on emerging markets and also due to lower commission expenses of $1.5 million related to
decreased sales, and a reduction in travel expenses of $1.0 million and trade show expenses of $0.9 million.
General and Administrative
Expenses
General and administrative expenses decreased 37% or $5.7 million to $9.9 million for 2009
compared to $15.6 million for 2008. The decrease was primarily due to a reduction in personnel-related costs of $0.8 million, accounting and legal fees of $0.8 million and bad debt expenses of $0.8 million. In addition, during the second quarter of
2008, we significantly reduced our assumptions regarding estimated future sublease income primarily as a result of the deteriorating real estate market. Accordingly, we increased the excess lease liability balance by $3.3 million with a
corresponding charge to general and administrative expenses during the second quarter of 2008.
Gain on Sale of Fixed Assets
Gain on sale of fixed assets was $0.5 million for 2008. The gain in 2008 was attributable to the sale of
fixed assets associated with our sale of the GigaMux legacy product line in January 2008. There were no similar sales of fixed assets for 2009.
Gain on Sale of Intangible Assets
Gain on sale of intangible assets was $4.4 million for 2008.
The gain in 2008 was attributable to the sale of intangible assets associated with our sale of the GigaMux legacy product line sold in January 2008 and the sale of our non-strategic legacy patents. There were no similar sales of intangible assets
for 2009.
38
Impairment of Intangible Assets and Goodwill
We review goodwill and other long-lived assets, including intangible assets, for impairment annually or whenever events or
changes in circumstances indicate that the carrying value of an asset may not be recoverable. In June 2008, we reviewed goodwill for impairment due to the significant decrease in our market capitalization in the three months ended June 30, 2008
as well as subsequent to period end. We determined that indicators of impairment existed, resulting in a goodwill impairment loss of $70.4 million during the second quarter of 2008. At December 31, 2008, we had no remaining goodwill or
intangible assets.
Interest Expense
Interest expense for 2009 decreased by $0.3 million to $1.3 million compared to $1.6 million in 2008 due to a decrease in the outstanding debt balances and a reduction in interest rates during 2009.
Interest Income
Interest income for 2009 decreased by $0.6 million to $0.1 million compared to $0.7 million in 2008 due to lower average balances of cash and short-term investments and a reduction in interest rates
during 2009.
Income Tax Provision
During the years ended December 31, 2009 and 2008, we recorded an income tax provision of $0.2 million and $0.3 million, respectively, related to foreign and state taxes. No material provision or
benefit for income taxes was recorded in 2009 and 2008, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have continued to record a full valuation
allowance.
2008 COMPARED WITH 2007
Revenue
Information about our net revenue for products and services for 2008 and 2007 is
summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Decrease
|
|
|
%
change
|
|
Products
|
|
$
|
141.9
|
|
$
|
164.6
|
|
$
|
(22.7
|
)
|
|
(14
|
)%
|
Services
|
|
|
4.3
|
|
|
10.8
|
|
|
(6.5
|
)
|
|
(60
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
146.2
|
|
$
|
175.4
|
|
$
|
(29.2
|
)
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Information about our revenue for North America and international markets for 2008
and 2007 is summarized below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
2007
|
|
Increase
(Decrease)
|
|
|
%
change
|
|
Revenue by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
60.8
|
|
$
|
79.4
|
|
$
|
(18.6
|
)
|
|
(23
|
)%
|
Canada
|
|
|
5.4
|
|
|
10.5
|
|
|
(5.1
|
)
|
|
(49
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
66.2
|
|
|
89.9
|
|
|
(23.7
|
)
|
|
(26
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
32.2
|
|
|
37.8
|
|
|
(5.6
|
)
|
|
(15
|
)%
|
Europe, Middle East, Africa
|
|
|
43.9
|
|
|
42.2
|
|
|
1.7
|
|
|
4
|
%
|
Asia Pacific
|
|
|
3.9
|
|
|
5.5
|
|
|
(1.6
|
)
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
80.0
|
|
|
85.5
|
|
|
(5.5
|
)
|
|
(6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
146.2
|
|
$
|
175.4
|
|
$
|
(29.2
|
)
|
|
(17
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Total revenue decreased 17% or $29.2 million to $146.2 million for 2008
compared to $175.4 million for 2007 of which $24.5 million of the decrease was due to the sales of our Access Node and GigaMux legacy product lines in December 2007 and January 2008, respectively.
Product revenue accounted for the majority of the total decrease in revenue. In 2008, product revenue decreased 14% or $22.7
million and service revenue decreased 60% or $6.5 million compared to 2007. Service revenue represents revenue from maintenance and other services associated with product shipments.
International revenue decreased 6% or $5.5 million to $80.0 million in 2008 and represented 55% of total revenue compared
with 49% in 2007. The increase in the concentration of international revenue represented the relative demand for our next-generation products in both existing and new network deployments among emerging international carriers compared to carriers in
developed countries. Revenues in North America were adversely impacted by sale of legacy product lines, the global economic recession and credit contraction which caused many of our customers to defer or reduce their network expansion in 2008.
Cost of Revenue and Gross Profit
Total cost of revenue, including stock-based compensation, decreased $15.3 million, or 13% to $101.1 million for 2008, compared to $116.4 million for 2007. Total cost of revenue was 69% of revenue
for 2008, compared to 66% of revenue for 2007. Gross profit percentage decreased from 34% in 2007 to 31% in 2008 due to an overall decline in net revenue and product mix. Personnel-related costs for 2008 decreased over 2007 by $2.4 million due to
headcount reductions as a result of the consolidation of our manufacturing operations into one facility.
In
December 2006, we entered into an agreement to sell inventory and certain assets related to our iMarc legacy product line to a third party. The sale of the iMarc product line was not treated as a discontinued operation since it did not represent a
component of our company that had operations and cash flows that were clearly distinguishable, operationally and for financial reporting purposes, from the rest of the entity. Upon performance of certain obligations and delivery of assets in the
first quarter of 2007, we recognized a gain of $1.8 million that was recorded in cost of revenue. Upon sale of the remaining iMarc inventory during the second quarter of 2007, we recognized an additional gain of $1.1 million that was recorded in
cost of revenue.
In December 2007, we sold inventory and certain assets related to our Access Node legacy
product line to a third party. The sale of the Access Node product line was not treated as a discontinued operation since it did not represent a component of our company that had operations and cash flows that were clearly distinguishable,
operationally and for financial reporting purposes, from the rest of the entity. Upon sale of the Access Node inventory, we recognized a gain of $1.7 million that was recorded in cost of revenue in 2007. In 2008, we recognized an additional gain of
$0.2 million that was recorded in cost of revenue. We will continue to record additional gain in the future contingent upon attainment of certain earnout provisions.
In January 2008, we sold inventory and certain assets related to our GigaMux legacy product line to a third party. The sale of the GigaMux legacy product line was not treated as a
discontinued operation since it did not represent a component of our company that had operations and cash flows that were clearly distinguishable, operationally and for financial reporting purposes, from the rest of the entity. Upon sale of the
GigaMux legacy product line, we recognized a gain of $1.3 million during the first quarter of 2008 that was recorded in cost of revenue. Additional gains of $1.1 million were recognized in 2008 related to certain earnout provisions which were
recorded in cost of revenue.
Research and Product Development Expenses
Research and product development expenses decreased 17% or $5.6 million to $27.1 million for 2008 compared to $32.7 million
for 2007. The decrease was primarily due to restructuring efforts to streamline processes which reduced personnel-related costs by $4.1 million and prototype costs by $0.5 million.
40
Sales and Marketing Expenses
Sales and marketing expenses decreased 15% or $4.9 million to $28.3 million for 2008 compared to $33.2 million for 2007. The decrease was primarily attributable to a reduction
in personnel-related costs of $2.5 million from lower headcount as we realigned our resources to focus on emerging markets and also due to lower commission expenses of $1.1 million related to decreased sales, and reduced travel expenses of $0.7
million.
General and Administrative Expenses
General and administrative expenses increased 53% or $5.4 million to $15.6 million for 2008 compared to $10.2 million for 2007. During the second quarter of 2008, we significantly
reduced our assumptions regarding estimated future sublease income primarily as a result of the deteriorating real estate market. Accordingly, during the second quarter of 2008, we increased the excess lease liability for our Largo, Florida facility
by $3.3 million with a corresponding charge to general and administrative expenses. In addition, the general and administrative expenses increased over prior year due to a higher allocation of facility-related expenses of $1.9 million due to
consolidation of certain facilities.
Gain on Sale of Fixed Assets
Gain on sale of fixed assets decreased $0.2 million to $0.5 million for 2008 compared to $0.7 million for 2007. The gain in
2008 was attributable to the sale of fixed assets associated with our sale of the GigaMux legacy product line in January 2008, while the gain in 2007 was primarily attributable to the sale of fixed assets associated with our sale of the Access Node
legacy product line in December 2007.
Gain on Sale of Intangible Assets
Gain on sale of intangible assets decreased $0.6 million to $4.4 million for 2008 compared to $5.0 million for 2007. The gain
in 2008 was attributable to the sale of intangible assets related to our GigaMux legacy product line sold in January 2008 and the sale of non-strategic legacy patents. The gain in 2007 was attributable to the sale of non-strategic legacy patents.
Impairment of Intangible Assets and Goodwill
We review goodwill and other long-lived assets, including intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. In June 2008, we reviewed goodwill for impairment due to the significant decrease in our market capitalization in the three months ended June 30, 2008 as well as subsequent to period end. We determined that
indicators of impairment existed, resulting in a goodwill impairment loss of $70.4 million during the second quarter of 2008. No impairment of goodwill or intangible assets was recorded in 2007.
Interest Expense
Interest expense for 2008 decreased by $0.6 million to $1.6 million compared to $2.2 million in 2007 due to a decrease in the outstanding debt balances and a reduction in interest rates during 2008.
Interest Income
Interest income for 2008 decreased by $1.1 million to $0.7 million compared to $1.8 million in 2007 due to lower average balances of cash and short-term investments and a reduction in interest rates during 2008.
Income Tax Provision
During the years ended December 31, 2008 and 2007, we recorded an income tax provision of $0.3 million and $0.4 million, respectively, related to foreign and state taxes. No material provision or
benefit for income
41
taxes was recorded in 2008 and 2007, due to our recurring operating losses and the significant uncertainty regarding the realization of our net deferred tax assets, against which we have
continued to record a full valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
Our operations are financed through a combination of our existing cash, cash equivalents and short-term investments,
available credit facilities, and sales of equity and debt instruments, based on our operating requirements and market conditions.
At December 31, 2009, cash, cash equivalents and short-term investments were $21.8 million compared to $36.2 million at December 31, 2008. This amount included cash and cash equivalents of $21.5
million at December 31, 2009 compared to $33.3 million at December 31, 2008. The decrease in cash and cash equivalents of $11.8 million was attributable to net cash used in operating and financing activities of $8.5 million and $5.3
million, respectively, offset by net cash provided by investing activities of $1.9 million.
Operating Activities
For fiscal year 2009, net cash used in operating activities consisted of a net loss of $10.0 million, adjusted for non-cash
charges totaling $5.9 million and an increase in operating assets totaling $4.4 million. The most significant components of the changes in net operating assets were an increase in accounts receivable of $15.2 million offset by a decrease in
inventories of $10.5 million. The increase in accounts receivable was primarily due to the aging of Etisalat which accounted for 66% of net accounts receivable as of December 31, 2009. The decrease in inventories was primarily due to better
utilization of inventory during 2009.
For fiscal year 2008, net cash used in operating activities consisted
of a net loss of $92.5 million, adjusted for non-cash charges totaling $77.9 million and a decrease in operating assets totaling $2.2 million, offset by a gain on sales of assets and intangible assets of $0.5 million and $4.4 million, respectively.
The most significant components of the changes in net operating assets were decreases in accounts receivable and inventories of $6.5 million and $4.0 million, respectively, offset by a decrease in accounts payable of $8.6 million. The decrease in
accounts receivable was primarily a result of lower revenue due to the global credit contraction. The decrease in inventories was primarily the result of the sale of the GigaMux legacy product line in January 2008 in which we allocated proceeds of
$8.5 million to the sale of such inventories.
Investing Activities
For fiscal year 2009, net cash provided by investing activities consisted primarily of proceeds from the sale and maturity of
short-term investments of $2.9 million offset by purchases of short-term investments of $0.3 million and equipment purchases of $0.8 million.
For fiscal year 2008, net cash provided by investing activities consisted primarily of proceeds from the sale and maturity of short-term investments of $20.4 million and proceeds from the sale of assets
and intangible assets of $4.9 million, offset by purchases of short-term investments of $10.9 million and equipment purchases of $1.4 million. The proceeds from the sale of assets and intangible assets of $4.9 million were related to the sale of the
GigaMux legacy product line in January 2008, and sale of non-strategic legacy patents in November 2008.
Financing Activities
For fiscal year 2009, net cash used in financing activities consisted primarily of repayment of the debt
and credit facility of $5.4 million primarily in connection with the replacement of our existing revolving line of credit and letter of credit facility with Silicon Valley Bank, or SVB, with a new revolving line of credit and letter of credit in
March 2009.
For fiscal year 2008, net cash used in financing activities consisted primarily of repayment of
debt of $0.3 million, offset by proceeds from the issuance of common stock of $0.3 million.
42
Cash Management
Our primary source of liquidity comes from our cash and cash equivalents and short-term investments, which totaled $21.8 million at December 31, 2009, and our $20.0 million
revolving line of credit and letter of credit facility with SVB (the SVB Facility). Our cash and cash equivalents are held in accounts managed by third party financial institutions and consist of invested cash and cash in our operating accounts. To
date, we have experienced no loss of access to our cash or cash equivalents; however, there can be no assurance that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
Our short-term investments are classified as available-for-sale and consist of securities that are readily convertible to
cash, including certificates of deposits, commercial paper and government securities, with original maturities at the date of acquisition ranging from 90 days to one year. Our short-term investments are available for use in current operations or
other activities. To date, we have experienced no significant realized losses or other-than-temporary impairment losses with respect to our short-term investments; however, there can be no assurance that our short-term investments will not be
affected by future volatility and uncertainty in the financial markets. At current revenue levels, we anticipate that some portion of our existing cash and cash equivalents and short-term investments will continue to be consumed by operations.
Under the SVB Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that
we are able to borrow under the SVB Facility varies based on the eligible accounts receivable, as defined in the agreement, as long as the principal amount outstanding does not exceed $20.0 million. In addition, under the SVB Facility, we are able
to utilize the facility as security for letters of credit.
Under the SVB Facility, $10.0 million was
outstanding at December 31, 2009. In addition, $8.1 million was committed as security for various letters of credit and $0.3 million was unused and available for borrowing as of December 31, 2009. The amounts borrowed under the SVB
Facility bear interest, payable monthly, at a floating rate that is SVBs prime rate plus 2.5%. The minimum interest rate is 6.5%. The interest rate was 6.5% at December 31, 2009.
Our obligations under the SVB Facility are secured by substantially all of our personal property assets and those of our
subsidiaries, including our intellectual property. The SVB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If we do not comply with the various covenants and other requirements under the SVB
Facility, SVB is entitled to, among other things, require the immediate repayment of all outstanding amounts and sell our assets to satisfy the obligations under the SVB Facility. As of December 31, 2009, we were in compliance with these
covenants. We make no assurances that we will be in compliance with these covenants in the future.
In January
2010, we repaid the $10.0 million outstanding under the SVB Facility. In March 2010, the SVB Facility was renewed and the aggregate amount available for borrowing increased to $25.0 million as discussed in Note 15 to the consolidated financial
statements.
Future Requirements and Funding Sources
Our fixed commitments for cash expenditures consist primarily of payments under operating leases, inventory purchase commitments, and payments of principal and interest for debt
obligations. As a result of the Paradyne acquisition in 2005, we assumed a lease commitment for facilities in Largo, Florida. The term of the lease expires in June 2012 and had an estimated remaining obligation of approximately $10.9 million as of
December 31, 2009. We intend to continue to occupy only a portion of these facilities and are evaluating our options to exit the excess portion of the lease. We have recorded a liability of $4.4 million as of December 31, 2009, which we
believe is adequate to cover costs incurred to exit the excess portion of these facilities, net of estimated sublease income.
As a result of the financial demands of major network deployments and the difficulty in accessing capital markets, network service providers continue to request financing assistance from their suppliers.
From time to
43
time, we may provide or commit to extend credit or credit support to our customers. This financing may include extending the terms for product payments to customers. Depending upon market
conditions, we may seek to factor these arrangements to financial institutions and investors to reduce the amount of our financial commitments associated with such arrangements. For example, during the year ended December 31, 2008, we sold
$10.2 million of customer trade receivables to Silicon Valley Bank on a non-recourse basis in exchange for cash. The sale of the receivables did not represent a securitization, and there was no continuing involvement or interests in the receivables
by us after the sale. Our ability to provide customer financing is limited and depends upon a number of factors, including our capital structure, the level of our available credit and our ability to factor commitments to third parties. Any extension
of financing to our customers will limit the capital that we have available for other uses.
Our accounts
receivable, while not considered a primary source of liquidity, represents a concentration of credit risk because a significant portion of the accounts receivable balance at any point in time typically consists of large balances due from a
relatively small number of customer account balances. As of December 31, 2009, Etisalat accounted for 66% of net accounts receivable, and receivables from customers in countries other than the United States represented 82% of net accounts
receivable. We do not currently have any material commitments for capital expenditures, or any other material commitments aside from operating leases for our facilities, inventory purchase commitments and debt.
We expect that operating losses and negative cash flows from operations may continue. In order to meet our liquidity needs
and finance our capital expenditures and working capital needs for our business, we may need to raise additional capital through the issuance of debt or equity financing or the sale of assets. Continued uncertainty in credit markets may negatively
impact our ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt
may include covenants, restrictions and financial ratios that may restrict our ability to operate our business. Likewise, any equity financing could result in additional dilution of our stockholders. If we are unable to obtain additional capital or
are required to obtain additional capital on terms that are not favorable to us, we may be required to reduce the scope of our planned product development and sales and marketing efforts beyond the reductions we have previously taken. Based on our
current plans and business conditions, we believe that our existing cash, cash equivalents and short-term investments and available credit facilities will be sufficient to satisfy our anticipated cash requirements for the foreseeable future.
Contractual Commitments and Off-Balance Sheet Arrangements
At December 31, 2009, our future contractual commitments by fiscal year were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
2014
|
Operating leases
|
|
$
|
11,706
|
|
$
|
4,783
|
|
$
|
4,531
|
|
$
|
2,299
|
|
$
|
93
|
|
$
|
|
Purchase commitments
|
|
|
6,074
|
|
|
6,074
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
10,000
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
|
18,696
|
|
|
411
|
|
|
18,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,476
|
|
$
|
21,268
|
|
$
|
22,816
|
|
$
|
2,299
|
|
$
|
93
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
The operating lease amounts shown above represent primarily off-balance sheet arrangements. For operating lease commitments,
a liability is generally not recorded on our balance sheet unless the facility represents an excess facility for which an estimate of the facility exit costs has been recorded on our balance sheet, net of estimated sublease income. For operating
leases that include contractual commitments for operating expenses and maintenance, estimates of such amounts are included based on current rates. Payments made under operating
44
leases will be treated as rent expense for the facilities currently being utilized. Of the total $11.7 million operating lease amount, $4.4 million has been recorded as a liability on our balance
sheet as of December 31, 2009.
Purchase commitments
The purchase commitments shown above represent non-cancellable inventory purchase commitments as of December 31, 2009. The inventory purchase commitments typically allow for
cancellation of orders 30 days in advance of the required inventory availability date as set by us at time of order.
Line of Credit and
Debt
The debt and line of credit obligations have been recorded as liabilities on our balance sheet. The
debt and line of credit obligation amounts shown above represent the scheduled principal repayments, but not the associated interest payments which may vary based on changes in market interest rates. At December 31, 2009 the interest rate on
our outstanding debt and line of credit obligations was 6.5%.
As of December 31, 2009, we had $10.0
million outstanding under our line of credit and an additional $8.1 million committed as security for various letters of credit, as discussed in Note 6 to the consolidated financial statements.
Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued,
The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
(the
Codifications), a replacement of the existing codification standards. The Codification, which was launched on July 1, 2009, became the single source of authoritative non-governmental U.S. generally accepted accounting principles
(GAAP), superseding various existing authoritative accounting pronouncements. The Codification eliminates the existing GAAP hierarchy and establishes one level of authoritative GAAP. All other literature is considered non-authoritative. This
Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We adopted the Codification in the third quarter of 2009. There was no change to our consolidated financial statements due
to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements in our notes to consolidated financial statements.
In August 2009, FASB issued an Accounting Standards Update (ASU) 2009-05,
Fair Value Measurements and Disclosures (820)-Measuring Liabilities at Fair
Value
. The update provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value of such liability using one or
more of the techniques prescribed by the update. We adopted the updated standards in the third quarter of 2009. The adoption did not have any impact on our consolidated financial statements.
In September 2009, FASB issued ASU 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue
Arrangements
. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and the consideration
allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not have Vendor-Specific Objective Evidence (VSOE) or third-party evidence of selling price;
and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years
beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective application. We are currently assessing the impact of these amendments to the ASC on our accounting and
reporting systems and processes; however, at this time we are unable to quantify the impact on our financial statements of our adoption or determine the timing and method of our adoption.
45
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
Cash, Cash Equivalents and Short-Term Investments
We
consider all cash and highly liquid investments purchased with an original maturity of less than three months to be cash equivalents.
Cash, cash equivalents and short-term investments consisted of the following as of December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
|
|
|
|
December 31,
2009
|
|
December 31,
2008
|
Cash and cash equivalents
|
|
$
|
21,460
|
|
$
|
33,251
|
Short-term investment
|
|
|
306
|
|
|
2,992
|
|
|
|
|
|
|
|
|
|
$
|
21,766
|
|
$
|
36,243
|
|
|
|
|
|
|
|
Concentration of Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments consist principally of demand deposit and money market accounts, commercial paper and corporate debentures and bonds with credit
ratings of AA or better. Cash and cash equivalents and short-term investments are principally held with various domestic financial institutions with high credit standing. Allowances are maintained for potential doubtful accounts. During the year
ended December 31, 2009, Etisalat accounted for 19% of net revenue. No customer accounted for 10% or more of net revenue for the year ended December 31, 2008.
As of December 31, 2009, Etisalat accounted for 66% of net accounts receivable, which were denominated in a foreign currency. As of December 31, 2008, Etisalat accounted
for 14% of net accounts receivable, and another customer accounted for 18% of net accounts receivable.
As of
December 31, 2009 and December 31, 2008, receivables from customers in countries other than the United States represented 82% and 75%, respectively, of net accounts receivable.
Interest Rate Risk
Our exposure to market risk for changes
in interest rates relates primarily to our investment portfolio and long-term debt. We do not use derivative financial instruments in our investment portfolio. We do not hold financial instruments for trading or speculative purposes. We manage our
interest rate risk by maintaining an investment portfolio primarily consisting of debt instruments of high credit quality and relatively short average maturities. Under our investment policy, short-term investments have a maximum maturity of one
year from the date of acquisition, and the average maturity of the portfolio cannot exceed six months. Due to the relatively short maturity of the portfolio, a 10% increase in market interest rates at December 31, 2009 would decrease the fair
value of the portfolio by less than $0.1 million.
As of December 31, 2009, our outstanding debt balance
was $18.7 million. Interest on our debt accrues on the unpaid principal balance at a variable interest rate (which adjusts every six months) equal to the sum of the LIBOR rate plus 3.0% per annum; provided that in no event will the variable
interest rate (a) exceed 14.2488% per annum, (b) be less than 6.5% per annum, or (c) be adjusted by more than 1.0% at any adjustment date. Assuming the outstanding balance on our variable rate debt remains constant over a
year, a 2% increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.4 million.
46
Foreign Currency Risk
We transact business in various foreign countries. Substantially all of our assets are located in the United States. We have sales operations throughout Europe, Asia, the Middle East
and Latin America. We are exposed to foreign currency exchange rate risk associated with foreign currency denominated assets and liabilities, primarily intercompany receivables and payables. Accordingly, our operating results are exposed to changes
in exchange rates between the U.S. dollar and those currencies. During 2009 and 2008, we did not hedge any of our foreign currency exposure. During both 2009 and 2008, we recorded $0.1 million of foreign exchange loss in other income (expense) on
our statements of operations.
We have performed sensitivity analyses as of December 31, 2009 and 2008,
using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The
sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in a foreign exchange loss of $0.1 million for 2009 and 2008. This sensitivity analysis assumes a parallel adverse shift in
foreign currency exchange rates, which do not always move in the same direction. Actual results may differ materially.
47
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Zhone Technologies, Inc.:
We have audited the accompanying
consolidated balance sheets of Zhone Technologies, Inc. and subsidiaries (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and cash flows for each of the
years in the three-year period ended December 31, 2009. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zhone Technologies, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Zhone Technologies, Inc.s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 16, 2010 expressed an
unqualified opinion on the effectiveness of the Companys internal control over financial reporting.
|
/s/ KPMG LLP
|
|
Mountain View, California
|
March 16, 2010
|
49
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Zhone Technologies, Inc.:
We have audited Zhone Technologies,
Inc.s internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Zhone Technologies, Inc.s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Zhone Technologies, Inc. maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2009, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Zhone Technologies, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders equity and cash flows for each of the years in the three-year
period ended December 31, 2009, and our report dated March 16, 2010 expressed an unqualified opinion on those consolidated financial statements.
|
/s/ KPMG LLP
|
|
Mountain View, California
|
March 16, 2010
|
50
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2009 and 2008
(In thousands, except par value)
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,460
|
|
|
$
|
33,251
|
|
Short-term investments
|
|
|
306
|
|
|
|
2,992
|
|
Accounts receivable, net of allowances for sales returns and doubtful accounts of $5,042 in 2009 and $5,155 in
2008
|
|
|
37,107
|
|
|
|
23,665
|
|
Inventories
|
|
|
30,228
|
|
|
|
40,706
|
|
Prepaid expenses and other current assets
|
|
|
2,098
|
|
|
|
2,654
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
91,199
|
|
|
|
103,268
|
|
Property and equipment, net
|
|
|
18,961
|
|
|
|
20,003
|
|
Restricted cash
|
|
|
58
|
|
|
|
123
|
|
Other assets
|
|
|
41
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
110,259
|
|
|
$
|
123,449
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
14,914
|
|
|
$
|
12,719
|
|
Line of credit
|
|
|
10,000
|
|
|
|
15,000
|
|
Current portion of long-term debt
|
|
|
411
|
|
|
|
380
|
|
Accrued and other liabilities
|
|
|
12,031
|
|
|
|
13,162
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
37,356
|
|
|
|
41,261
|
|
Long-term debt, less current portion
|
|
|
18,285
|
|
|
|
18,698
|
|
Other long-term liabilities
|
|
|
2,945
|
|
|
|
4,193
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
58,586
|
|
|
|
64,152
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value. Authorized 180,000 shares; issued and outstanding 30,272 and 30,137 shares as of
December 31, 2009 and 2008, respectively (1)
|
|
|
30
|
|
|
|
30
|
|
Additional paid-in capital
|
|
|
1,066,974
|
|
|
|
1,064,614
|
|
Other comprehensive income
|
|
|
293
|
|
|
|
250
|
|
Accumulated deficit
|
|
|
(1,015,624
|
)
|
|
|
(1,005,597
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
51,673
|
|
|
|
59,297
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
110,259
|
|
|
$
|
123,449
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Authorized, issued and outstanding share amounts reflect the one-for-five reverse stock split effected on March 11, 2010.
|
See accompanying notes to consolidated financial statements.
51
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2009, 2008 and 2007
(In thousands, except
per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Net revenue
|
|
$
|
126,501
|
|
|
$
|
146,160
|
|
|
$
|
175,448
|
|
Cost of revenue (1)
|
|
|
81,106
|
|
|
|
101,096
|
|
|
|
116,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
45,395
|
|
|
|
45,064
|
|
|
|
59,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and product development (1)
|
|
|
22,113
|
|
|
|
27,063
|
|
|
|
32,720
|
|
Sales and marketing (1)
|
|
|
22,042
|
|
|
|
28,269
|
|
|
|
33,192
|
|
General and administrative (1)
|
|
|
9,933
|
|
|
|
15,609
|
|
|
|
10,170
|
|
Gain on sale of fixed assets
|
|
|
|
|
|
|
(455
|
)
|
|
|
(659
|
)
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(4,397
|
)
|
|
|
(5,000
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
70,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
54,088
|
|
|
|
136,490
|
|
|
|
70,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(8,693
|
)
|
|
|
(91,426
|
)
|
|
|
(11,345
|
)
|
Interest expense
|
|
|
(1,331
|
)
|
|
|
(1,625
|
)
|
|
|
(2,213
|
)
|
Interest income
|
|
|
47
|
|
|
|
708
|
|
|
|
1,813
|
|
Other income
|
|
|
121
|
|
|
|
78
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(9,856
|
)
|
|
|
(92,265
|
)
|
|
|
(11,708
|
)
|
Income tax provision
|
|
|
171
|
|
|
|
270
|
|
|
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,027
|
)
|
|
$
|
(92,535
|
)
|
|
$
|
(12,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share (2)
|
|
$
|
(0.33
|
)
|
|
$
|
(3.08
|
)
|
|
$
|
(0.40
|
)
|
Weighted average shares outstanding used to compute basic and diluted net loss per share (2)
|
|
|
30,200
|
|
|
|
30,068
|
|
|
|
29,925
|
|
|
|
|
|
(1) Amounts include stock-based compensation cost as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
104
|
|
|
|
158
|
|
|
|
296
|
|
Research and product development
|
|
|
414
|
|
|
|
479
|
|
|
|
717
|
|
Sales and marketing
|
|
|
484
|
|
|
|
511
|
|
|
|
603
|
|
General and administrative
|
|
|
1,258
|
|
|
|
1,203
|
|
|
|
1,250
|
|
(2)
|
All per share and weighted average share amounts have been adjusted to retroactively reflect the one-for-five reverse stock split effected on March 11, 2010.
|
See accompanying notes to consolidated financial statements.
52
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders Equity
Years ended December 31, 2009, 2008 and 2007 (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Other
comprehensive
income
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders
equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Balances as of December 31, 2006
|
|
29,855
|
|
$
|
30
|
|
$
|
1,058,436
|
|
$
|
98
|
|
|
$
|
(900,960
|
)
|
|
$
|
157,604
|
|
Exercise of stock options for cash
|
|
14
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
14
|
|
Issuance of common stock in connection with employee stock purchase plan
|
|
128
|
|
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
653
|
|
Issuance of common stock for services
|
|
8
|
|
|
|
|
|
49
|
|
|
|
|
|
|
|
|
|
|
49
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
2,817
|
|
|
|
|
|
|
|
|
|
|
2,817
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,102
|
)
|
|
|
(12,102
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
505
|
|
|
|
|
|
|
|
505
|
|
Unrealized gain on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,590
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2007
|
|
30,005
|
|
|
30
|
|
|
1,061,969
|
|
|
610
|
|
|
|
(913,062
|
)
|
|
|
149,547
|
|
Exercise of stock options for cash
|
|
6
|
|
|
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
6
|
|
Issuance of common stock in connection with employee stock purchase plan
|
|
111
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
288
|
|
Issuance of common stock for services
|
|
15
|
|
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
81
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
2,270
|
|
|
|
|
|
|
|
|
|
|
2,270
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,535
|
)
|
|
|
(92,535
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
(355
|
)
|
|
|
|
|
|
|
(355
|
)
|
Unrealized loss on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(92,895
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
Additional
paid-in
capital
|
|
Other
comprehensive
income
|
|
|
Accumulated
deficit
|
|
|
Total
stockholders
equity
|
|
|
|
Shares
|
|
Amount
|
|
|
|
|
Balances as of December 31, 2008
|
|
30,137
|
|
|
30
|
|
|
1,064,614
|
|
|
250
|
|
|
|
(1,005,597
|
)
|
|
|
59,297
|
|
Exercise of stock options for cash
|
|
20
|
|
|
|
|
|
13
|
|
|
|
|
|
|
|
|
|
|
13
|
|
Issuance of common stock in connection with employee stock purchase plan
|
|
83
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
87
|
|
Issuance of common stock for services
|
|
32
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
2,194
|
|
|
|
|
|
|
|
|
|
|
2,194
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,027
|
)
|
|
|
(10,027
|
)
|
Foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
48
|
|
Unrealized loss on available for sale securities
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2009
|
|
30,272
|
|
$
|
30
|
|
$
|
1,066,974
|
|
$
|
293
|
|
|
$
|
(1,015,624
|
)
|
|
$
|
51,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share amounts reflect the one-for-five reverse stock split effected on March 11, 2010.
See accompanying notes to consolidated financial statements.
54
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2009, 2008 and 2007
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,027
|
)
|
|
$
|
(92,535
|
)
|
|
$
|
(12,102
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,834
|
|
|
|
2,204
|
|
|
|
2,660
|
|
Stock-based compensation
|
|
|
2,260
|
|
|
|
2,351
|
|
|
|
2,866
|
|
Impairment of goodwill
|
|
|
|
|
|
|
70,401
|
|
|
|
|
|
Gain on sale of intangible assets
|
|
|
|
|
|
|
(4,397
|
)
|
|
|
(5,000
|
)
|
Gain on sale of fixed assets
|
|
|
|
|
|
|
(455
|
)
|
|
|
(659
|
)
|
Loss on disposal of fixed assets
|
|
|
2
|
|
|
|
|
|
|
|
|
|
(Accretion) or impairment of investments
|
|
|
44
|
|
|
|
(169
|
)
|
|
|
(462
|
)
|
Provision for sales returns and doubtful accounts
|
|
|
1,780
|
|
|
|
3,143
|
|
|
|
3,305
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(15,222
|
)
|
|
|
6,450
|
|
|
|
(4,735
|
)
|
Inventories
|
|
|
10,478
|
|
|
|
3,992
|
|
|
|
338
|
|
Prepaid expenses and other current assets
|
|
|
556
|
|
|
|
1,150
|
|
|
|
585
|
|
Other assets
|
|
|
14
|
|
|
|
21
|
|
|
|
3
|
|
Accounts payable
|
|
|
2,195
|
|
|
|
(8,557
|
)
|
|
|
2,383
|
|
Accrued and other liabilities
|
|
|
(2,379
|
)
|
|
|
(823
|
)
|
|
|
(3,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(8,465
|
)
|
|
|
(17,224
|
)
|
|
|
(14,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax refund related to acquisition of Sorrento
|
|
|
|
|
|
|
|
|
|
|
336
|
|
Proceeds from sale of intangible assets
|
|
|
|
|
|
|
4,397
|
|
|
|
5,000
|
|
Proceeds from sale of assets
|
|
|
|
|
|
|
502
|
|
|
|
2,250
|
|
Purchases of property and equipment
|
|
|
(794
|
)
|
|
|
(1,436
|
)
|
|
|
(1,365
|
)
|
Purchases of short-term investments
|
|
|
(308
|
)
|
|
|
(10,879
|
)
|
|
|
(26,992
|
)
|
Proceeds from maturity of short-term investments
|
|
|
2,945
|
|
|
|
20,412
|
|
|
|
32,437
|
|
Changes in restricted cash
|
|
|
65
|
|
|
|
63
|
|
|
|
(87
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by investing activities
|
|
|
1,908
|
|
|
|
13,059
|
|
|
|
11,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock and warrants
|
|
|
100
|
|
|
|
294
|
|
|
|
667
|
|
Borrowings (repayment) under credit facilities
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
500
|
|
Repayment of debt
|
|
|
(382
|
)
|
|
|
(327
|
)
|
|
|
(7,644
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(5,282
|
)
|
|
|
(33
|
)
|
|
|
(6,477
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
48
|
|
|
|
(355
|
)
|
|
|
505
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(11,791
|
)
|
|
|
(4,553
|
)
|
|
|
(9,169
|
)
|
Cash and cash equivalents at beginning of year
|
|
|
33,251
|
|
|
|
37,804
|
|
|
|
46,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
21,460
|
|
|
$
|
33,251
|
|
|
$
|
37,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during period for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxes
|
|
$
|
171
|
|
|
$
|
371
|
|
|
$
|
349
|
|
Interest
|
|
|
1,339
|
|
|
|
1,639
|
|
|
|
2,226
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of restricted cash
|
|
|
|
|
|
|
|
|
|
|
537
|
|
See accompanying notes
to consolidated financial statements.
55
ZHONE TECHNOLOGIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Organization and Summary of Significant Accounting Policies
(a)
Description of Business
Zhone Technologies, Inc. (sometimes referred to, collectively
with its subsidiaries, as Zhone or the Company) designs, develops and manufactures communications network equipment for telecommunications, wireless and cable operators worldwide. The Companys products allow network
service providers to deliver video and interactive entertainment services in addition to their existing voice and data service offerings. The Company was incorporated under the laws of the state of Delaware in June 1999. The Company began operations
in September 1999 and is headquartered in Oakland, California.
(b) Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries.
All significant inter-company transactions and balances have been eliminated in consolidation.
(c) Reverse Stock Split
On March 11, 2010, the Company effected a one-for-five reverse stock split. All
share and per share information included in the Companys consolidated financial statements and accompanying notes presented herein reflect the retroactive effect of the one-for-five reverse stock split, as discussed in Note 15.
(d) Risks and Uncertainties
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Companys continued losses reduced cash,
cash equivalents and short-term investments in 2008 and 2009. As of December 31, 2009, the Company had approximately $21.8 million in cash, cash equivalents and short-term investments and $10.0 million of current debt outstanding under its
revolving line of credit and letter of credit facility (the SVB Facility). The Company renewed the SVB Facility on March 15, 2010, as discussed in Note 15. As of December 31, 2009, the Company also had long-term debt of $18.7
million outstanding under a secured real estate loan that becomes due in April 2011. Continued uncertainty in the credit markets may negatively impact the Companys ability to access debt financing or to refinance existing indebtedness in the
future on favorable terms, or at all. In order to meet liquidity needs and finance capital expenditures and working capital, the Company may be required to sell assets, or to borrow on potentially unfavorable terms. The Company may be unable to sell
assets or access additional indebtedness to meet these needs. As a result, the Company may become unable to pay its ordinary expenses, including its debt service, on a timely basis. The Companys current lack of liquidity could harm it by:
|
|
|
increasing its vulnerability to adverse economic conditions in its industry or the economy in general;
|
|
|
|
requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;
|
|
|
|
limiting its ability to plan for, or react to, changes in its business and industry; and
|
|
|
|
influencing investor and customer perceptions about its financial stability and limiting its ability to obtain financing or acquire customers.
|
The global unfavorable economic and market conditions and the financial
crisis could impact the Companys business in a number of ways, including:
|
|
|
Potential deferment of purchases and orders by customers;
|
56
|
|
|
Customers inability to obtain financing to make purchases from the Company and/or maintain their business;
|
|
|
|
Negative impact from increased financial pressures on third-party dealers, distributors and retailers; and
|
|
|
|
Negative impact from increased financial pressures on key suppliers.
|
If the economic, market and geopolitical conditions in the United States and the rest of the world do not
improve, or if they continue to deteriorate, the Company may experience material adverse impacts on its business, operating results and financial condition.
During 2008 and 2009, the Company implemented several activities intended to reduce costs, improve operating efficiencies and change its operations to more closely align them with
its key strategic focus, including the sale of legacy product lines and headcount reductions.
The Company expects that operating losses and negative cash flows from operations may continue. In order to meet the Companys liquidity needs and finance its capital expenditures and working capital needs for the business, the Company
may need to raise additional capital through the issuance of debt or equity financing or the sale of assets. Continued uncertainty in credit markets may negatively impact the Companys ability to access debt financing or to refinance existing
indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include covenants, restrictions and financial ratios that may
restrict the Companys ability to operate its business. The recent events in the U.S. credit markets have also had an adverse effect on other U.S. financial markets and have adversely affected the trading prices of equity securities of many
U.S. companies, including Zhone, which may make it more difficult or costly for the Company to raise capital through the issuance of common stock, preferred stock or other equity securities. If the Company elects to raise equity capital, this may be
dilutive to existing stockholders and could reduce the trading price of Zhone common stock. If the Company is unable to obtain additional capital or is required to obtain additional capital on terms that are not favorable, it may be required to
reduce the scope of its planned product development and sales and marketing efforts beyond the reductions it has previously taken. Based on the Companys current plans and business conditions, it believes that its existing cash, cash
equivalents and short-term investments and available credit facilities will be sufficient to satisfy its anticipated cash requirements for the foreseeable future.
(e) Use of Estimates
The
preparation of the consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ materially from those
estimates.
(f) Revenue Recognition
The Company recognizes revenue when the earnings process is complete. The Company recognizes product revenue
upon shipment of product under contractual terms which transfer title to customers upon shipment, under normal credit terms, net of estimated sales returns and allowances at the time of shipment. Revenue is deferred if there are significant
post-delivery obligations, if collection is not considered reasonably assured at the time of sale, or if the fees are not fixed or determinable. When significant post-delivery obligations exist, revenue is deferred until such obligations are
fulfilled. The Companys arrangements generally do not have any significant post-delivery obligations. If the Companys arrangements include customer acceptance provisions, revenue is recognized upon obtaining the signed acceptance
certificate from the customer, unless the Company can objectively demonstrate that the delivered
57
products or services meet all the acceptance criteria specified in the arrangement prior to obtaining the signed acceptance. In those instances where revenue is recognized prior to obtaining
the signed acceptance certificate, the Company uses successful completion of customer testing as the basis to objectively demonstrate that the delivered products or services meet all the acceptance criteria specified in the arrangement. The Company
also considers historical acceptance experience with the customer, as well as the payment terms specified in the arrangement, when revenue is recognized prior to obtaining the signed acceptance certificate. The Company offers products and services
such as support, education and training, hardware upgrades and post-warranty support. For multiple element revenue arrangements, the Company establishes the fair value of these products and services based primarily on sales prices when the products
and services are sold separately. If fair value cannot be established for undelivered elements, all of the revenue under the arrangement is deferred until those elements have been delivered. When collectibility is not reasonably assured, revenue is
recognized when cash is collected. Revenue from education services and support services is recognized over the contract term or as the service is performed. The Company makes certain sales to product distributors. These customers are given certain
privileges to return a portion of inventory. Return privileges generally allow distributors to return inventory based on a percent of purchases made within a specific period of time. The Company recognizes revenue on sales to distributors that have
contractual return rights when the products have been sold by the distributors, unless there is sufficient customer specific sales and sales returns history to support revenue recognition upon shipment. In those instances when revenue is recognized
upon shipment to distributors, the Company uses historical rates of return from the distributors to provide for estimated product returns. The Company accrues for warranty costs, sales returns and other allowances at the time of shipment based on
historical experience and expected future costs.
(g) Allowances for Sales Returns and Doubtful Accounts
The Company records an allowance for sales returns for estimated future product
returns related to current period product revenue. The allowance for sales returns is recorded as a reduction of revenue and an allowance against accounts receivable. The Company bases its allowance for sales returns on periodic assessments of
historical trends in product return rates and current approved returned products. If the actual future returns were to deviate from the historical data on which the reserve had been established, the Companys future revenue could be adversely
affected.
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of customers to make payments for amounts owed to the Company. The allowance for doubtful accounts is recorded as a charge to general and administrative expenses. The Company bases its allowance on periodic assessments
of its customers liquidity and financial condition through analysis of information obtained from credit rating agencies, financial statement review and historical collection trends. Additional allowances may be required in the future if the
liquidity or financial conditions of its customers deteriorate, resulting in impairment in their ability to make payments.
Activity under the Companys allowance for sales returns and doubtful accounts was comprised as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Balance at beginning of year
|
|
$
|
5,155
|
|
|
$
|
5,941
|
|
|
$
|
6,939
|
|
Charged to revenue
|
|
|
1,800
|
|
|
|
2,356
|
|
|
|
2,728
|
|
Charged to (reversal of) expense
|
|
|
(20
|
)
|
|
|
787
|
|
|
|
577
|
|
Utilization
|
|
|
(1,893
|
)
|
|
|
(3,929
|
)
|
|
|
(4,303
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
5,042
|
|
|
$
|
5,155
|
|
|
$
|
5,941
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
The allowance for doubtful accounts was $3.8 million and
$3.9 million as of December 31, 2009 and 2008, respectively.
(h) Inventories
Inventories are stated at the lower of cost or market, with cost being determined using the first-in,
first-out (FIFO) method. In assessing the net realizable value of inventories, the Company is required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once inventory has been
written down to its estimated net realizable value, its carrying value cannot be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in forecasted demand occurs, or the Company experiences a higher incidence
of inventory obsolescence due to rapidly changing technology and customer requirements, the Company may incur significant charges for excess inventory.
(i) Operating Lease Liabilities
As
a result of the acquisition of Paradyne in September 2005, the Company assumed certain lease liabilities for facilities in Largo, Florida. The Company has accrued a liability for the excess portion of these facilities. The computation of the
estimated liability includes a number of assumptions and subjective variables. These variables include the level and timing of future sublease income, amount of contractual variable costs, future market rental rates, discount rate, and other
estimated expenses. If circumstances change, and the Company employs different assumptions in future periods, the future lease liability may differ significantly from what the Company has recorded in the current period and could materially affect
its net loss and net loss per share.
(j) Foreign Currency Translation
For operations outside the United States, the Company translates assets and liabilities of foreign
subsidiaries, whose functional currency is the local currency, at end of period exchange rates. Revenues and expenses are translated at monthly average rates of exchange prevailing during the year. The adjustment resulting from translating the
financial statements of such foreign subsidiaries, is included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders equity. Realized gains and losses on foreign currency transactions are
included in other income (expense) in the accompanying consolidated statement of operations. During 2009, 2008 and 2007, the Company recorded a $0.1 million realized foreign exchange loss for each period in other income (expense) on its statements
of operations.
(k) Cash and Cash Equivalents, and Short-Term Investments
The Company considers all cash and highly liquid investments purchased with an original maturity of less than
three months to be cash equivalents.
Short-term investments include securities with original
maturities greater than three months and less than one year and are available for use in current operations or other activities. Short-term investments consist principally of commercial paper, corporate debentures and bonds. Short-term investments
have been classified as available for sale. Under this classification, the investments are reported at fair value, with unrealized gains and losses excluded from results of operations and reported, net of tax, as a component of other comprehensive
loss in stockholders equity. Realized gains and losses and declines in value judged to be other than temporary are included in results of operations. Gains and losses from the sale of securities are based on the specific-identification method.
59
Cash, cash equivalents, and short-term investments consisted
of the following as of December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
Fair Value
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
19,050
|
|
$
|
|
|
$
|
|
|
$
|
19,050
|
Money Market Funds
|
|
|
2,410
|
|
|
|
|
|
|
|
|
2,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
21,460
|
|
$
|
|
|
$
|
|
|
$
|
21,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
Corporate Securities
|
|
|
306
|
|
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
306
|
|
$
|
|
|
$
|
|
|
$
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents,
and short-term investments consisted of the following as of December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
|
|
Unrealized
Gain
|
|
Unrealized
Loss
|
|
|
Fair Value
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
26,607
|
|
$
|
|
|
$
|
|
|
|
$
|
26,607
|
Money Market Funds
|
|
|
6,644
|
|
|
|
|
|
|
|
|
|
6,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
33,251
|
|
$
|
|
|
$
|
|
|
|
$
|
33,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Paper
|
|
$
|
896
|
|
$
|
2
|
|
$
|
|
|
|
$
|
898
|
Corporate Securities
|
|
|
2,091
|
|
|
5
|
|
|
(2
|
)
|
|
|
2,094
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,987
|
|
$
|
7
|
|
$
|
(2
|
)
|
|
$
|
2,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(l) Fair Value of Financial Instruments
The carrying amounts of the Companys consolidated financial instruments which include
cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of December 31, 2009 and 2008 due to the relatively short maturities of these instruments. The carrying value of the
Companys debt obligations at December 31, 2009 and 2008 approximate their fair value.
(m) Concentration of
Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents and short-term investments consist principally of demand deposit and money market accounts, commercial paper and
corporate debentures and bonds with credit ratings of AA or better. Cash and cash equivalents and short-term investments are principally held with various domestic financial institutions with high credit standing. Allowances are maintained for
potential doubtful accounts. During the year ended December 31, 2009, Etisalat accounted for 19% of net revenue. No customer accounted for 10% or more of net revenue for the year ended December 31, 2008.
The target customers for the Companys products are network service providers that operate voice, data
and video communications networks. There are a limited number of potential customers in this target market. The Company expects that a significant portion of the Companys future revenue will depend on sales of its products to a limited number
of customers. Any failure of one or more customers to purchase products from the Company for any reason, including any downturn in their businesses, would seriously harm the Companys business, financial condition and results of operations.
60
As of December 31, 2009, Etisalat accounted for 66% of
net accounts receivable, which are denominated in a foreign currency. As of December 31, 2008, Etisalat accounted for 14% of net accounts receivable, and another customer accounted for 18% of net accounts receivable.
As of December 31, 2009 and December 31, 2008, receivables from customers in countries other than
the United States represented 82% and 75%, respectively, of net accounts receivable.
The
Company may provide or commit to extend credit or credit support to certain customers. During the years ended December 31, 2009 and 2008, the Company sold zero and $10.2 million, respectively, of customer trade receivables to financial
institutions on a non-recourse basis in exchange for cash. The sale of the receivables did not represent a securitization, and there was no continuing involvement or interests in the receivables by the Company after the sale. As of December 31,
2009, the Company did not have any significant customer financing commitments or guarantees.
The Companys products are concentrated in the communications equipment market, which is highly competitive and subject to rapid change. Significant technological changes in the industry could adversely affect operating results. The
Companys inventories include components that may be specialized in nature, and subject to rapid technological obsolescence. The Company actively manages inventory levels, and the Company considers technological obsolescence and potential
changes in product demand based on macroeconomic conditions when estimating required allowances to reduce recorded inventory amounts to market value. Such estimates could change in the future.
The Companys growth and ability to meet customer demands are also dependent on its ability to obtain
timely deliveries of components from suppliers and contract manufacturers. The Company depends on contract manufacturers and sole or limited source suppliers for several key components. If the Company were unable to obtain these components on a
timely basis, the Company would be unable to meet its customers product delivery requirements which could adversely impact operating results. While the Company is not solely dependent on one contract manufacturer, it expects to continue to
rely on contract manufacturers to fulfill a portion of its product manufacturing requirements.
(n) Property and
Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives. Useful life for buildings is 30 years. Useful lives for laboratory and manufacturing equipment range from 10 to 30 years. Useful lives of all other property and equipment range from 3 to 5
years. Leasehold improvements are generally amortized over the shorter of their useful lives or the remaining lease term.
(o) Goodwill
Costs in excess of the fair value of tangible and
identifiable intangible assets acquired and liabilities assumed in a purchase business combination are recorded as goodwill. The Company tests for goodwill impairment at least annually using a two-step approach. The Company evaluates goodwill on an
annual basis in November, at a minimum, and whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. Impairment of goodwill is tested at the reporting unit level by comparing the reporting units
carrying amount, including goodwill, to the fair value of the reporting unit. The Company has determined that it operates in a single segment with one operating unit. The Company performs the annual goodwill impairment test using the market
approach. If the carrying amount of the reporting unit exceeds its fair value, indication of goodwill impairment exists and a second step is performed to measure the amount of impairment loss, if any. During the year ended December 31, 2008,
the Company recorded non-cash goodwill impairment charges of $70.4 million, as discussed in Note 3.
(p) Purchased
Intangibles and Other Long-Lived Assets
The Company reviews long-lived assets,
including intangible assets other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may
61
not be fully recoverable based on expected undiscounted cash flows attributable to that asset. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to future net undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future net undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Any assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and would no longer be
depreciated. The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.
(q) Accounting for Stock-Based Compensation
The Company has adopted the Black Scholes model to estimate the fair value of options. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Companys consolidated statement of operations.
Awards of stock options granted to consultants under the Companys share-based compensation plans are
accounted for at fair value determined by using the Black Scholes option pricing. These options are generally immediately exercisable and expire seven to ten years from the date of grant. The Company values non-employee options using the Black
Scholes model. Non-employee options subject to vesting are valued as they become vested.
Effective January 1, 2006, the Company changed its method of attributing the values of the stock-based compensation to expense from the accelerated method to the straight line method. Compensation expense for all employee share-based
payments awards granted on or prior to December 31, 2005 will continue to be recognized using the accelerated method while compensation expense for all share-based payment awards granted subsequent to December 31, 2005 is recognized using
the straight line method.
(r) Income Taxes
The Company uses the asset and liability method to account for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial reporting and the income tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The Company has recorded a full valuation allowance against its net deferred tax
assets at December 31, 2009 and 2008 due to the significant uncertainty regarding whether the deferred tax assets will be realized.
(s) Net Loss per Common Share
Basic
net loss per share is computed by dividing the net loss applicable to holders of common stock for the period by the weighted average number of shares of common stock outstanding during the period. The calculation of diluted net loss per share gives
effect to common stock equivalents; however, potential common equivalent shares are excluded if their effect is antidilutive. Potential common equivalent shares are composed of common stock subject to repurchase rights and incremental shares of
common equivalent shares issuable upon the exercise of stock options and warrants, and the conversion of convertible debt.
(t) Other Comprehensive Income (Loss)
Other comprehensive income (loss)
is recorded directly to stockholders equity and includes unrealized gains and losses which have been excluded from the consolidated statements of operations. These unrealized gains and losses consist of foreign currency translation adjustments
and unrealized gains and losses on available-for-sale securities.
62
(u) Recent Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (FASB) issued,
The FASB Accounting
Standards Codification and the Hierarchy of Generally Accepted Accounting Principles
(the Codifications), a replacement of the existing codification standards. The Codification, which was launched on July 1, 2009, became the
single source of authoritative non-governmental U.S. generally accepted accounting principles (GAAP), superseding various existing authoritative accounting pronouncements. The Codification eliminates the existing GAAP hierarchy and establishes one
level of authoritative GAAP. All other literature is considered non-authoritative. This Codification is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted the
Codification in the third quarter of 2009. There was no change to the Companys consolidated financial statements due to the implementation of the Codification other than changes in reference to various authoritative accounting pronouncements
in its notes to consolidated financial statements.
In August 2009, FASB issued an Accounting
Standards Update (ASU) 2009-05,
Fair Value Measurements and Disclosures (820)-Measuring Liabilities at Fair Value
. The update provides clarification that in circumstances in which a quoted price in an active market for the
identical liability is not available, a reporting entity is required to measure fair value of such liability using one or more of the techniques prescribed by the update. The Company adopted the updated standards in the third quarter of 2009. The
adoption did not have any impact on the Companys consolidated financial statements.
In
September 2009, FASB issued ASU 2009-13,
Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements
. As summarized in ASU 2009-13, ASC Topic 605 has been amended (1) to provide updated guidance on whether multiple
deliverables exist, how the deliverables in an arrangement should be separated, and the consideration allocated; (2) to require an entity to allocate revenue in an arrangement using estimated selling prices of deliverables if a vendor does not
have Vendor-Specific Objective Evidence (VSOE) or third-party evidence of selling price; and (3) to eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method. The
accounting changes summarized in ASU 2009-14 and ASU 2009-13 are both effective for fiscal years beginning on or after June 15, 2010, with early adoption permitted. Adoption may either be on a prospective basis or by retrospective
application. The Company is currently assessing the impact of these amendments to the ASC on its accounting and reporting systems and processes; however, at this time the Company is unable to quantify the impact on its financial statements of
its adoption or determine the timing and method of its adoption.
(2) Operating Lease Liabilities
As a result of the acquisition of Paradyne Networks, Inc. (Paradyne) in September 2005, the Company assumed
certain lease liabilities for facilities in Largo, Florida. The Company has accrued a liability for the excess portion of these facilities. The term of the lease expires in June 2012 and had an estimated remaining obligation of approximately $10.9
million as of December 31, 2009, of which $4.4 million was accrued for excess facilities, net of estimated sublease income. During the second quarter of 2008, the Company significantly reduced its assumptions regarding estimated future sublease
income primarily as a result of the deteriorating real estate market. Accordingly, during the second quarter of 2008, the Company increased its excess lease liability balance by $3.3 million with a corresponding charge to general and administrative
expenses. During 2009, the Company assumed that it would no longer be able to sublease the remaining excess space due to the continued deterioration in the real estate market. Accordingly, during 2009, the Company increased its excess lease
liability balance by $0.6 million, with a corresponding charge to general and administrative expenses. A summary of current period activity related to excess lease liabilities accrued is as follows (in thousands):
|
|
|
|
|
|
|
Exit Costs
|
|
Balance at December 31, 2008
|
|
$
|
5,597
|
|
Cash payments, net
|
|
|
(1,758
|
)
|
Change in estimate
|
|
|
579
|
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
4,418
|
|
|
|
|
|
|
63
A summary of the excess lease liabilities at their net
present value is as follows (in thousands):
|
|
|
|
|
|
|
Exit Costs
|
|
Future lease payments for excess space
|
|
$
|
5,919
|
|
Less: contractual sublease income
|
|
|
(1,501
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
4,418
|
|
|
|
|
|
|
The current portion of the excess lease liability as of December 31, 2009 of $1.8
million is classified in Accrued and other liabilities and the long-term portion of $2.6 million is classified in Other long-term liabilities in the accompanying consolidated balance sheet.
(3) Long-lived Assets, Goodwill and Other Acquisition-Related Intangible Assets
The Company tests goodwill for impairment using a two step approach on an annual basis in November, or when certain
indicators of impairment exist. Impairment of goodwill is tested at the reporting unit level by comparing the reporting units carrying amount, including goodwill, to the fair value of the reporting unit using the market approach. The Company
has determined that it operates in a single segment with one reporting unit. If the carrying amount of the reporting unit exceeds its fair value, a second step is performed to measure the amount of impairment loss, if any. In 2008, the Company
determined that the reporting units carrying value exceeded its fair value and the second step was performed, resulting in a goodwill impairment loss of $70.4 million.
Changes in the carrying amount of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year ended
December 31,
|
|
|
|
2009
|
|
2008
|
|
Beginning balance
|
|
$
|
|
|
$
|
70,401
|
|
Impairment of goodwill
|
|
|
|
|
|
(70,401
|
)
|
Other adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
The Company reviews long-lived assets, including intangible assets other than goodwill, for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable based on expected undiscounted cash flows attributable to that asset. The amount of any impairment is measured as the
difference between the carrying value and the fair value of the impaired asset.
The Company estimates the
fair value of its long-lived assets based on a combination of the market, income and replacement cost approaches. In the application of the impairment testing, the Company is required to make estimates of future operating trends and resulting cash
flows and judgments on discount rates and other variables. Actual future results and other assumed variables could differ from these estimates. As of December 31, 2009, the Companys long-lived assets consisted of $19.0 million of net
property and equipment.
Sale of Intangible Assets
During 2008 and 2007, the Company sold some of its non-strategic patents for $1.1 million and $5.0 million, respectively. The
resulting $1.1 million and $5.0 million gain were recorded within operating expenses as gain on sale of intangible assets. There were no similar sales of intangible assets during 2009.
Sale of Legacy Inventory and Other Assets
In January 2008, the Company sold its GigaMux legacy product line to a third party. The sale of the GigaMux legacy
product line was not treated as a discontinued operation since it did not represent a component
64
of the Company that had operations and cash flows that were clearly distinguishable, operationally and for financial reporting purposes, from the rest of the entity. The Company allocated the
proceeds received to receivables, inventory, fixed assets and intangible assets based on the relative fair value of the assets sold. The Company recognized a gain of $1.3 million on the sale of the inventory related to this product line in the first
quarter of 2008 that was recorded in cost of revenue. The Company also recognized a gain of $0.5 million and $3.2 million on the sale of fixed assets and intangible assets, respectively, in the first quarter of 2008 that was recorded as a component
of operating expenses. The Company is entitled to additional contingent consideration for the sale of the GigaMux legacy product line upon the buyers usage of inventory and/or attainment of certain performance targets through December 2010.
Additional contingent consideration, if any, will be recorded upon receipt of cash as an additional gain in cost of revenue. During 2008, the Company received contingent consideration of $1.1 million related to the buyers usage of inventory
related to the GigaMux legacy product line. During 2009, the Company received additional contingent consideration of $0.4 million related to the buyers usage of inventory related to the GigaMux legacy product line.
In December 2007, the Company sold inventory and certain assets related to its Access Node legacy product line to a third
party. The sale of the Access Node product line was not treated as a discontinued operation since it did not represent a component of the Company that had operations and cash flows that were clearly distinguishable, operationally and for financial
reporting purposes, from the rest of the entity. Upon sale of the Access Node inventory, the Company recognized a gain of $1.7 million in 2007 that was recorded in cost of revenue. In 2008, the Company recognized an additional gain of $0.2 million
that was recorded in cost of revenue. During 2009, the Company recognized an additional gain of $0.2 million that was recorded in cost of revenue. The Company will continue to record additional gains in the future contingent upon attainment by the
buyer of certain earnout provisions. In addition to the sale of inventory, the Company also sold fixed assets related to the Access Node legacy product line. Upon the sale of the fixed assets, the Company recorded a gain of $0.7 million in 2007,
which was recorded as a component of operating expenses.
Sale of Land
During the second quarter of 2007, the Company completed the sale of approximately 3.625 acres of undeveloped land at a price
of $1.5 million to the Redevelopment Agency of the City of Oakland pursuant to a repurchase option exercised by it. No gain or loss was recorded on the sale.
(4) Fair Value Measurement
The Company utilizes the market
approach to measure fair value of its financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The Company utilizes a fair value hierarchy that is intended to increase consistency and comparability in fair value
measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would
use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions. The fair value hierarchy consists of the
following three levels:
|
|
|
Level 1 -
|
|
Inputs are quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 -
|
|
Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that
are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.
|
|
|
Level 3 -
|
|
Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.
|
65
The following table represents the Companys financial assets and
liabilities at fair value on a recurring basis as of December 31, 2009 and the basis for that measurement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date Using (In Thousands)
|
|
|
Total
|
|
Quoted
Prices in
Active
Markets for
Identical
Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Money market funds (1)
|
|
$
|
2,410
|
|
$
|
2,410
|
|
$
|
|
|
$
|
|
Corporate securities (2)
|
|
|
306
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,716
|
|
$
|
2,410
|
|
$
|
306
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Included in cash and cash equivalents on the Companys consolidated balance sheet.
|
(2)
|
Included in short-term investments on the Companys consolidated balance sheet.
|
Effective January 1, 2009, the Company adopted fair value measurements for all non-financial assets and liabilities
that are measured at fair value on a non-recurring basis, such as goodwill and identifiable intangible assets. The adoption of fair value measurement for non-financial assets and liabilities did not materially impact the Companys consolidated
financial statements for the year ended December 31, 2009 and the Company does not expect the adoption to have a material impact on the amounts reported in its consolidated financial statements in future periods.
(5) Balance Sheet Detail
Balance sheet detail as of December 31, 2009 and 2008 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
20,898
|
|
|
$
|
26,720
|
|
Work in process
|
|
|
3,071
|
|
|
|
5,160
|
|
Finished goods
|
|
|
6,259
|
|
|
|
8,826
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
30,228
|
|
|
$
|
40,706
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net:
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
4,821
|
|
|
$
|
4,821
|
|
Buildings
|
|
|
14,007
|
|
|
|
14,007
|
|
Machinery and equipment
|
|
|
9,420
|
|
|
|
8,682
|
|
Computers and acquired software
|
|
|
3,795
|
|
|
|
3,536
|
|
Furniture and fixtures
|
|
|
313
|
|
|
|
513
|
|
Leasehold improvements
|
|
|
376
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,732
|
|
|
|
31,940
|
|
Less accumulated depreciation and amortization
|
|
|
(13,771
|
)
|
|
|
(11,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,961
|
|
|
$
|
20,003
|
|
|
|
|
|
|
|
|
|
|
66
Depreciation and amortization expense associated with property and equipment
amounted to $1.8 million, $2.2 million and $2.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.
|
|
|
|
|
|
|
|
|
2009
|
|
2008
|
Accrued and other liabilities (in thousands):
|
|
|
|
|
|
|
Accrued warranty
|
|
$
|
1,662
|
|
$
|
1,979
|
Accrued compensation
|
|
|
2,700
|
|
|
2,765
|
Accrued exit costs
|
|
|
1,785
|
|
|
1,718
|
Deferred revenue
|
|
|
624
|
|
|
683
|
Other
|
|
|
5,260
|
|
|
6,017
|
|
|
|
|
|
|
|
|
|
$
|
12,031
|
|
$
|
13,162
|
|
|
|
|
|
|
|
The Company accrues for warranty costs
based on historical trends for the expected material and labor costs to provide warranty services. Warranty periods are generally one year from the date of shipment. The following table summarizes the activity related to the product warranty
liability during the years ended December 31, 2009 and 2008 (in thousands):
|
|
|
|
|
Balance at December 31, 2007
|
|
$
|
2,487
|
|
Charged to operations
|
|
|
1,625
|
|
Claims/settlements
|
|
|
(2,133
|
)
|
|
|
|
|
|
Balance at December 31, 2008
|
|
$
|
1,979
|
|
Charged to operations
|
|
|
1,537
|
|
Claims/settlements
|
|
|
(1,854
|
)
|
|
|
|
|
|
Balance at December 31, 2009
|
|
$
|
1,662
|
|
|
|
|
|
|
(6) Debt
Secured Real Estate Loan
Long-term debt as of
December 31, 2009 and 2008 consisted of a secured real estate loan as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Secured real estate loan due April 2011
|
|
$
|
18,696
|
|
|
$
|
19,078
|
|
Less current portion of long-term debt
|
|
|
(411
|
)
|
|
|
(380
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,285
|
|
|
$
|
18,698
|
|
|
|
|
|
|
|
|
|
|
Aggregate debt maturities as of December 31, 2009 were $0.4 million in fiscal 2010 and
$18.3 million in fiscal 2011.
In December 2005, the Company entered into an amendment to an existing loan
with a financial institution relating to the financing of its Oakland, California campus (the Amended Loan). Under the Amended Loan, (a) the outstanding principal balance was paid down from approximately $31.1 million to
approximately $20.0 million, (b) the maturity date was extended five years to April 1, 2011, (c) the floor rate was reduced from 8.0% per annum to 6.5% per annum, (d) the variable rate margin was reduced from
3.5% per annum to 3.0% per annum, (e) the amortization period for purposes of calculating monthly principal payments was amended to a period of 25 years commencing on January 1, 2006, and (f) the financial institution
cancelled the Companys $6.0 million letter of credit. Interest accrues on the unpaid principal balance at a variable interest rate (which adjusts every six months) equal to the sum of the LIBOR rate plus 3.0% per annum; provided that in
no event will the variable interest rate (a) exceed 14.2488% per annum, (b) be less than 6.5% per annum, or (c) be
67
adjusted by more than 1.0% at any adjustment date. The Company is obligated to make monthly payments of principal and interest in an amount which fully amortizes the then unpaid principal balance
of the loan and interest accruing thereon at the interest rate in effect in equal monthly installments over the remaining term of the amortization period. The interest rate on this debt was 6.5% as of December 31, 2009. The Companys
obligations under the Amended Loan remain secured by a security interest in the Companys campus. As of December 31, 2009 and 2008, the debt was collateralized by land and buildings with a net book value of $15.7 million and $16.1 million,
respectively.
Credit Facility
In March 2009, the Company entered into the SVB Facility with Silicon Valley Bank (SVB) to provide liquidity and working capital through March 15, 2010. The SVB
Facility replaced the prior SVB facilities.
Under the SVB Facility, the Company has the option of borrowing
funds at agreed upon interest rates. The amount that the Company is able to borrow under the SVB Facility varies based on the eligible accounts receivable, as defined in the agreement, as long as the principal amount outstanding does not exceed
$20.0 million. In addition, under the SVB Facility, the Company is able to utilize the facility as security for letters of credit.
Under the SVB Facility, $10.0 million was outstanding at December 31, 2009. In addition, $8.1 million was committed as security for various letters of credit and $0.3 million was unused and available
for borrowing as of December 31, 2009. The amounts borrowed under the SVB Facility bear interest, payable monthly, at a floating rate that is SVBs prime rate plus 2.5%. The minimum interest rate is 6.5%. The interest rate was 6.5% at
December 31, 2009.
The Companys obligations under the SVB Facility are secured by substantially
all of its personal property assets and those of its subsidiaries, including their intellectual property. The SVB Facility contains certain financial covenants, and customary affirmative covenants and negative covenants. If the Company does not
comply with the various covenants and other requirements under the SVB Facility, SVB is entitled to, among other things, require the immediate repayment of all outstanding amounts and sell the Companys assets to satisfy the obligations under
the SVB Facility. As of December 31, 2009, the Company was in compliance with these covenants.
(7) Stockholders Equity
(a) Overview
As of December 31, 2009 and 2008, the Companys equity capitalization consisted of 180 million authorized shares of common stock, of which 30.3 million and 30.1 million shares,
respectively, were outstanding.
On February 24, 2010, the Companys Board of Directors approved a
one-for-five reverse stock split of the Companys common stock with an effective date of March 11, 2010. The reverse stock split had been previously authorized by the Companys shareholders at a special shareholders meeting held on
October 16, 2008. Following the reverse split, 30.3 million shares of common stock were outstanding as of December 31, 2009. As a result of the reverse split, every five shares of the Companys common stock that were issued and
outstanding immediately prior to the opening of trading on March 12, 2010, were automatically combined into one issued and outstanding share without any change in the par value of such shares and the number of authorized but unissued shares of
the Companys common stock will be proportionally reduced. No fractional shares of common stock were issued as a result of the reverse stock split and shareholders of record will receive cash in lieu of fractional shares which they would be
entitled, based upon the closing price of Zhones common stock on March 11, 2010. References to shares of Zhone common stock, warrants and stock options (and associated dollar amounts) in this Form 10-K for the year ended December 31,
2009 are provided on a post-reverse stock split basis, as discussed in Note 15.
68
(b) Warrants
At December 31, 2009, the Company had a total of 7,238 warrants to purchase common stock outstanding at a weighted average exercise price of $116.55 per share. Warrants to
purchase 270,523 shares of common stock expired unexercised in 2009 with an aggregate exercise price of $5.6 million. The remaining outstanding warrants will expire in the years 2010 through 2014. No warrants were exercised in 2009, 2008 or 2007.
(c) Stock-Based Compensation
As of December 31, 2009, the Company had two types of share-based compensation plans related to stock options and employee stock purchases. The compensation cost that has been charged as an expense
in the statement of operations for those plans was $2.3 million, $2.4 million and $2.9 million for the years ended December 31, 2009, 2008 and 2007, respectively.
The following table summarizes stock-based compensation expense for the years ended December 31, 2009, 2008 and 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Compensation expense relating to employee stock options
|
|
$
|
2,142
|
|
$
|
2,140
|
|
$
|
2,603
|
Compensation expense relating to non-employees
|
|
|
69
|
|
|
81
|
|
|
49
|
Compensation expense relating to Employee Stock Purchase Plan
|
|
|
49
|
|
|
130
|
|
|
214
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
2,260
|
|
$
|
2,351
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
Stock Options
The Companys stock-based compensation plans are designed to attract, motivate, retain and reward talented employees,
directors and consultants and align stockholder and employee interests. The Company has two active stock option plans, the Amended and Restated Special 2001 Stock Incentive Plan and the Amended and Restated 2001 Stock Incentive Plan. Stock options
are primarily issued from the Amended and Restated 2001 Stock Incentive Plan. This plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards to officers, employees,
directors and consultants of the Company. Options may be granted at an exercise price less than, equal to or greater than the fair market value on the date of grant, except that any options granted to a 10% stockholder must have an exercise price
equal to at least 110% of the fair market value of the Companys common stock on the date of grant. The Board of Directors determines the term of each option, the option exercise price and the vesting terms. Stock options are generally granted
at an exercise price equal to the fair market value on the date of grant, expiring seven to ten years from the date of grant and vesting over a period of four years. On January 1 of each year, if the number of shares available for grant under
the Amended and Restated 2001 Stock Incentive Plan is less than 5% of the total number of shares of common stock outstanding as of that date, the shares available for grant under the plan are automatically increased by the amount necessary to make
the total number of shares available for grant equal to 5% of the total number of shares of common stock outstanding, or by a lesser amount as determined by the Board of Directors. As of December 31, 2009, 0.5 million shares were available
for grant under these plans.
The Company has estimated the fair value of stock-based payment awards on the
date of grant using the Black Scholes pricing model, which is affected by the Companys stock price as well as assumptions regarding a number of complex and subjective variables. These variables include the Companys expected stock price
volatility over the term of the awards, actual and projected employee option exercise behaviors, risk free interest rate and expected dividends. The estimated expected term of options granted was determined based on historical option exercise
trends. Estimated volatility was based on historical volatility and the risk free interest rate was based on U.S. Treasury yield in effect at the time of grant for the expected life of the options. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore used an expected dividend yield
69
of zero in the option valuation model. The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from
those estimates. Historical data was used to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The assumptions used to value option grants for the years ended December 31, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Expected term
|
|
4.7 years
|
|
|
4.7 years
|
|
|
4.7 years
|
|
Expected volatility
|
|
92
|
%
|
|
75
|
%
|
|
60
|
%
|
Risk free interest rate
|
|
2.36
|
%
|
|
1.86
|
%
|
|
4.13
|
%
|
The weighted average grant date fair value of options granted during the years ended December 31, 2009, 2008 and 2007 was $1.80, $0.45 and $3.40 per share, respectively. The intrinsic value of options exercised for the years ended
December 31, 2009, 2008 and 2007 was $0.03 million, $0.02 million and $0.08 million, respectively. For the years ended December 31, 2009, 2008 and 2007, the Company received $0.01 million, $0.01 million and $0.01 million in proceeds
from stock option exercises, respectively.
The following table sets forth the summary of option activity
under the stock option program for the year ended December 31, 2009 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding as of December 31, 2008
|
|
5,300
|
|
|
$
|
11.45
|
|
5.00
|
|
$
|
|
Granted
|
|
654
|
|
|
$
|
2.60
|
|
|
|
|
|
Canceled/Forfeited
|
|
(1,502
|
)
|
|
$
|
29.70
|
|
|
|
|
|
Exercised
|
|
(20
|
)
|
|
$
|
0.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2009
|
|
4,432
|
|
|
$
|
4.05
|
|
5.65
|
|
$
|
4,606
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2009
|
|
4,281
|
|
|
$
|
4.15
|
|
5.64
|
|
$
|
4,275
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable at December 31, 2009
|
|
1,434
|
|
|
$
|
10.25
|
|
4.99
|
|
$
|
1,297
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value represents the total pretax intrinsic value, based
on the Companys closing stock price as of December 31, 2009 of $2.05, which would have been received by the option holders had the option holders exercised their options as of that date.
As of December 31, 2009, there was $3.4 million of unrecognized compensation costs, adjusted for estimated forfeitures
related to unvested stock-based payments granted which are expected to be recognized over a weighted average period of 1.8 years.
In November 2008, the Company completed an offer (the Exchange Offer) to exchange certain stock options issued to eligible employees, officers and directors of Zhone under Zhones equity
incentive compensation plans. Stock options previously granted that had an exercise price per share of equal to or greater than $1.75 per share were eligible to be exchanged on a one-for-one basis for new stock options with an exercise price equal
to the last reported sale price of Zhone common stock on The Nasdaq Global Market on the date of grant. Options for an aggregate of 2.9 million shares of common stock were exchanged. The new stock options issued pursuant to the Exchange Offer
have an exercise price of $0.50, vest over a four-year period with no credit
70
for past vesting and have a seven-year term. The Exchange Offer will result in incremental stock-based compensation of approximately $0.7 million to be recognized over the four-year vesting
period. The remaining unrecognized compensation expense of the original grant will be amortized over the original requisite service period.
Employee Stock Purchase Plan
The Companys 2002 Employee Stock Purchase Plan
(ESPP) allows eligible employee participants to purchase shares of the Companys common stock at a price equal to 85% of the lower of the fair market value of the common stock at the beginning or the end of each offering period.
Participation is limited to 10% of an employees eligible compensation, not to exceed amounts allowed by the Internal Revenue Code. During the second quarter of 2006, the number of available shares under the ESPP was increased by 0.4 million.
At September 1, 2005, the Company changed from a six month offering period to a three month offering period under the ESPP. The following table summarizes shares purchased, weighted average purchase price, cash received and the aggregate
intrinsic value for ESPP purchases during the years ended December 31, 2009, 2008 and 2007 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Shares purchased
|
|
|
83
|
|
|
111
|
|
|
128
|
Weighted average purchase price
|
|
$
|
1.05
|
|
$
|
2.60
|
|
$
|
5.10
|
Cash received
|
|
$
|
87
|
|
$
|
288
|
|
$
|
653
|
Aggregate intrinsic value
|
|
$
|
66
|
|
$
|
50
|
|
$
|
182
|
The
assumptions used to value stock purchases under the Companys ESPP for the years ended December 31, 2009, 2008 and 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Expected term
|
|
3 months
|
|
|
3 months
|
|
|
3 months
|
|
Volatility
|
|
145
|
%
|
|
68
|
%
|
|
60
|
%
|
Risk free interest rate
|
|
0.2
|
%
|
|
2.0
|
%
|
|
4.7
|
%
|
Weighted average fair value per share
|
|
$0.50
|
|
|
$1.20
|
|
|
$1.75
|
|
(8) Net Loss Per Share
The following table sets forth the computation of basic and diluted net loss per share (in thousands,
except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(10,027
|
)
|
|
$
|
(92,535
|
)
|
|
$
|
(12,102
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding
|
|
|
30,200
|
|
|
|
30,068
|
|
|
|
29,925
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.33
|
)
|
|
$
|
(3.08
|
)
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71
The following table sets forth potential common stock that is not included
in the diluted net loss per share calculation above because their effect would be anti-dilutive for the periods indicated (in thousands, except exercise price per share data):
|
|
|
|
|
|
|
|
2009
|
|
Weighted Average
Exercise price
|
Warrants
|
|
7
|
|
$
|
116.55
|
Outstanding stock options and unvested restricted shares
|
|
4,445
|
|
$
|
4.05
|
|
|
|
|
|
|
|
|
4,452
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
Weighted Average
Exercise price
|
Warrants
|
|
278
|
|
$
|
23.35
|
Outstanding stock options and unvested restricted shares
|
|
5,310
|
|
$
|
11.45
|
|
|
|
|
|
|
|
|
5,588
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
Weighted Average
Exercise price
|
Warrants
|
|
437
|
|
$
|
21.00
|
Outstanding stock options and unvested restricted shares
|
|
4,995
|
|
$
|
21.05
|
|
|
|
|
|
|
|
|
5,432
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, there were zero shares of issued common
stock subject to repurchase.
(9) Income Taxes
The following is a summary of the components of income tax expense applicable to net loss before income taxes (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
|
|
$
|
|
State
|
|
|
70
|
|
|
104
|
|
|
150
|
Foreign
|
|
|
101
|
|
|
166
|
|
|
244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
171
|
|
|
270
|
|
|
394
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
State
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171
|
|
$
|
270
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
72
A reconciliation of the expected tax expense (benefit) to the actual tax
expense is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
Expected tax benefit at statutory rate (35%)
|
|
$
|
(3,450
|
)
|
|
$
|
(32,292
|
)
|
|
$
|
(4,098
|
)
|
State taxes, net of Federal effect
|
|
|
46
|
|
|
|
68
|
|
|
|
98
|
|
Goodwill amortization and impairment
|
|
|
|
|
|
|
24,640
|
|
|
|
|
|
Foreign rate differential
|
|
|
(1,204
|
)
|
|
|
(759
|
)
|
|
|
(1,474
|
)
|
Valuation allowance
|
|
|
3,960
|
|
|
|
7,764
|
|
|
|
4,886
|
|
Stock-based compensation
|
|
|
791
|
|
|
|
810
|
|
|
|
948
|
|
Other
|
|
|
28
|
|
|
|
39
|
|
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
171
|
|
|
$
|
270
|
|
|
$
|
394
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income tax purposes. Significant components of the Companys deferred tax assets and liabilities as of December 31, 2009 and 2008 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
Deferred assets:
|
|
|
|
|
|
|
|
|
Net operating loss, capital loss, and tax credit carryforwards
|
|
$
|
501,894
|
|
|
$
|
493,534
|
|
Fixed assets and intangible assets
|
|
|
45,000
|
|
|
|
50,687
|
|
Inventory and other reserves
|
|
|
11,773
|
|
|
|
12,056
|
|
Other
|
|
|
110
|
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax assets
|
|
|
558,777
|
|
|
|
556,403
|
|
Less valuation allowance
|
|
|
(558,777
|
)
|
|
|
(556,403
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2009 and 2008, the net changes in the valuation
allowance were an increase of $2.4 million and an increase of $3.6 million, respectively. The Company recorded a full valuation allowance against the net deferred tax assets at December 31, 2009 and 2008 since it is more likely than not that
the net deferred tax assets will not be realized due to the lack of previously paid taxes and anticipated taxable income.
As of December 31, 2009, the Company had net operating loss carryforwards for federal and California income tax purposes of approximately $1,295.5 million and $412.1 million, respectively, which are
available to offset future taxable income, if any, in years through 2029. Approximately $3.1 million and $2.0 million net operating loss carryforwards for federal and California income tax purposes, respectively, are attributable to employee stock
option deductions, the benefit from which will be allocated to paid-in-capital rather than current income when subsequently recognized. Federal and state laws impose substantial restrictions on the utilization of net operating loss and tax credit
carryforwards in the event of an ownership change for tax purposes, as defined in Section 382 of the Internal Revenue Code. As a result of such ownership changes, the Companys ability to realize the potential future benefit of tax losses
and tax credits that existed at the time of the ownership change will be significantly reduced. The Companys deferred tax asset and related valuation allowance would be reduced as a result. The Company has not yet performed a Section 382
study to determine the amount of reduction, if any.
As of December 31, 2009, the Company also had
research credit carryforwards for federal and state income tax purposes of approximately $20.7 million and $7.7 million, respectively, which are available to reduce future income taxes, if any, in years through 2029 and over an indefinite period,
respectively. Additionally, the Company had alternative minimum tax credit carryforwards for federal income tax purposes of approximately $0.1 million which are available to reduce future income taxes, if any, over an indefinite period. The Company
also had enterprise zone credit carryforwards for state income tax purposes of approximately $0.2 million which are available to reduce future state income taxes, if any, over an indefinite period.
73
The Company may have unrecognized tax benefits included in its deferred tax
assets which are subject to a full valuation allowance as of December 31, 2009 and 2008. However, the Company has not yet performed a study to determine the amount of such unrecognized tax benefits.
Interest and penalties, to the extent accrued on unrecognized tax benefits in the future, will be included in tax expense.
The Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction, and various
state and foreign jurisdictions. The open tax years for the major jurisdictions are as follows:
|
|
|
Federal
|
|
2006 2009
|
California and Canada
|
|
2005 2009
|
Brazil
|
|
2004 2009
|
Germany and United Kingdom
|
|
2003 2009
|
However, due to the fact the Company had net operating losses and credits carried forward in most jurisdictions, certain items attributable to technically closed years are still subject to adjustment by the relevant taxing authority through
an adjustment to tax attributes carried forward to open years.
In addition, to the extent the Company is
deemed to have a sufficient connection to a particular taxing jurisdiction to enable that jurisdiction to tax the Company but the Company has not filed an income tax return in that jurisdiction for the year(s) at issue, the jurisdiction would
typically be able to assert a tax liability for such years without limitation on the number of years it may examine.
The Company is not currently under examination for income taxes in any material jurisdiction.
(10) Related-Party Transactions
In the ordinary course of business, the Companys executive officers and non-employee directors are
reimbursed for travel related expenses when incurred for business purposes. The Company reimburses its Chairman, President and Chief Executive Officer, Morteza Ejabat, for the direct operating expenses incurred in the use of his private aircraft
when used for business purposes. The amount reimbursed for these expenses was $0.3 million, $0.5 million, and $0.6 million during the years ended December 31, 2009, 2008 and 2007, respectively.
(11) Commitments and Contingencies
Operating Leases
The Company has entered into operating leases for certain office space
and equipment, some of which contain renewal options.
Estimated future lease payments under all
non-cancelable operating leases with terms in excess of one year, including taxes and services fees, are as follows (in thousands):
|
|
|
|
|
|
Operating leases
|
Year ending December 31:
|
|
|
|
2010
|
|
|
4,783
|
2011
|
|
|
4,531
|
2012
|
|
|
2,299
|
2013
|
|
|
93
|
2014
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$
|
11,706
|
|
|
|
|
74
The total minimum lease payments shown above include projected payments and
obligations for leases that the Company is no longer utilizing, some of which relate to excess facilities obtained through acquisitions. At December 31, 2009, the Company had estimated commitments of $10.9 million related to facilities assumed
as a result of the Paradyne acquisition, of which $4.4 million was accrued for excess facilities, which is net of estimated sublease income. For operating leases that include contractual commitments for operating expenses and maintenance, estimates
of such amounts are included based on current rates. Rent expense under operating leases, excluding rent relating to excess facilities previously accrued, totaled $3.5 million, $4.0 million and $4.9 million for the years ended December 31,
2009, 2008 and 2007, respectively. Sublease rental income totaled $1.2 million, $1.3 million and $1.5 million for the years ended December 31, 2009, 2008 and 2007, respectively.
Other Commitments
Certain pre-acquisition contingencies from the acquisition of Tellium, Inc. in 2003 continue to exist for which the Company has reserved an estimated amount that it believes is sufficient to cover the
probable loss from these matters.
The Company is currently under audit examination by several state taxing
authorities for non income based taxes. The Company has reserved an estimated amount which the Company believes is sufficient to cover potential claims. However, there are certain examinations, including those related to acquired entities, for which
an amount cannot be reasonably estimated. In these instances, the examinations are still in the information gathering stage and no formal assessment has been made.
Performance Bonds
In the normal course of
operations, the Company arranges for the issuance of various types of surety bonds, such as bid and performance bonds, which are agreements under which the surety company guarantees that the Company will perform in accordance with contractual or
legal obligations. If the Company fails to perform under its obligations, the maximum potential payment under these surety bonds would have been $1.8 million as of December 31, 2009.
Royalties
The Company has certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the
underlying revenue.
(12) Litigation
Paradyne Matters
As a result of the acquisition of
Paradyne, the Company became involved in various legal proceedings, claims and litigation, including those identified below, relating to the operations of Paradyne prior to the acquisition of Paradyne.
A purported stockholder class action complaint was filed in December 2001 in the United States District Court in the
Southern District of New York against Paradyne, Paradynes then-current directors and executive officers, and each of the underwriters (the Underwriter Defendants) who participated in Paradynes initial public offering and
follow-on offering (collectively, the Paradyne Offerings). The complaint alleges that, in connection with the Paradyne Offerings, the Underwriter Defendants charged excessive commissions, inflated transaction fees not disclosed in the
applicable registration statements and allocated shares of the Paradyne Offerings to favored customers in exchange for purported promises by such customers to purchase additional shares in the aftermarket, thereby allegedly inflating the market
price for the Paradyne Offerings. The complaint
75
seeks damages in an unspecified amount for the purported class for the losses suffered during the class period. This action has been consolidated with hundreds of other securities class actions
commenced against more than 300 companies (collectively, the Issuer Defendants) and approximately 40 investment banks in which the plaintiffs make substantially similar allegations as those made against Paradyne with respect to the
initial public offerings and/or follow-on offerings at issue in those other cases. All of these actions have been consolidated before Judge Shira Scheindlin under the caption
In re: Initial Public Offering Securities Litigation
(the IPO
Actions).
In 2003, the Issuer Defendants participated in a global settlement among the plaintiffs and
the insurance companies that provided directors and officers insurance coverage to the Issuer Defendants (the Issuer Settlement). The Issuer Settlement agreements provided for the Issuer Defendants (including Paradyne) to be
fully released and dismissed from the IPO Actions. Under the terms of the Issuer Settlement agreements, Paradyne would not have been required to make any cash payment to the plaintiffs. Although the District Court preliminarily approved the Issuer
Settlement, the preliminary approval remained subject to a future final settlement order, after notice of settlement had been provided to class members and they had been afforded the opportunity to oppose or opt out of the settlement. However,
before the District Court could conduct its final settlement hearing, on December 5, 2006, the United States Court of Appeals for the Second Circuit (the Second Circuit) reversed an October 13, 2004 order of the District Court
in which Judge Scheindlin had granted class certification for six test cases in the IPO Actions. On April 4, 2007, the Second Circuit denied the plaintiffs petition for rehearing of the December 5, 2006 ruling. The
District Court has since made clear that the Issuer Settlement cannot be approved in its current form as a class action settlement in light of the Second Circuits December 5, 2006 ruling and has declined to schedule a final
approval hearing with respect to the Issuer Settlement for that reason.
In March 2009, counsel for the
plaintiffs, for the Issuer Defendants and for the insurance companies that provided directors and officers insurance to the Issuer Defendants restructured the Issuer Settlement and submitted the restructured Issuer Settlement to the
District Court for approval.
In October 2009, the District Court approved the restructured Issuer Settlement
submitted in March 2009. The restructured Issuer Settlement agreement provides for the Issuer Defendants (including Paradyne) to be fully released and dismissed from the IPO Actions. Under the terms of the approved restructured Issuer Settlement
agreement, Paradyne is not required to make any cash payments to the plaintiffs.
Other Matters
The Company is subject to other legal proceedings, claims and litigation arising in the ordinary course of business. While
the outcome of these matters is currently not determinable, the Company does not expect that the ultimate costs to resolve these matters will have a material adverse effect on its consolidated financial position or results of operations. However,
litigation is subject to inherent uncertainties, and unfavorable rulings could occur. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations of the period in which the ruling
occurs, or future periods.
(13) Employee Benefit Plan
The Company maintains a 401(k) plan for its employees whereby eligible employees may contribute up to a specified percentage of their earnings, on a pretax basis, subject to the
maximum amount permitted by the Internal Revenue Code. Under the 401(k) plan, the Company may make discretionary contributions. The Company made no discretionary contributions to the plan during the three years ended December 31, 2009.
(14) Enterprise Wide Information
The Company designs, develops and manufactures communications products for network service providers. The Company derives substantially all of its revenues from the sales of the Zhone product family. The
76
Companys chief operating decision maker is the Companys Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis
accompanied by disaggregated information about revenues by geographic region for purposes of making operating decisions and assessing financial performance. The Company has determined that it has operated within one discrete reportable business
segment since inception. The following summarizes required disclosures about geographic concentrations and revenue by products and services (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Revenue by Geography:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
50,146
|
|
$
|
60,830
|
|
$
|
79,453
|
Canada
|
|
|
5,458
|
|
|
5,391
|
|
|
10,497
|
|
|
|
|
|
|
|
|
|
|
Total North America
|
|
|
55,604
|
|
|
66,221
|
|
|
89,950
|
|
|
|
|
|
|
|
|
|
|
Latin America
|
|
|
18,016
|
|
|
32,197
|
|
|
37,808
|
Europe, Middle East, Africa
|
|
|
48,657
|
|
|
43,820
|
|
|
42,208
|
Asia Pacific
|
|
|
4,224
|
|
|
3,922
|
|
|
5,482
|
|
|
|
|
|
|
|
|
|
|
Total International
|
|
|
70,897
|
|
|
79,939
|
|
|
85,498
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,501
|
|
$
|
146,160
|
|
$
|
175,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2009
|
|
2008
|
|
2007
|
Revenue by products and services:
|
|
|
|
|
|
|
|
|
|
Products
|
|
$
|
120,939
|
|
$
|
141,916
|
|
$
|
164,570
|
Services
|
|
|
5,562
|
|
|
4,244
|
|
|
10,878
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
126,501
|
|
$
|
146,160
|
|
$
|
175,448
|
|
|
|
|
|
|
|
|
|
|
(15) Subsequent Events
Revolving Line of Credit Renewal
On March 15, 2010, the Company renewed its SVB Facility with SVB to provide liquidity and working capital through March 15, 2011.
Under the SVB Facility, the Company has the option of borrowing funds at agreed upon interest rates. The amount that the Company is able to borrow under the SVB Facility will vary
based on the eligible accounts receivable, as defined in the agreement, as long as the amount outstanding does not exceed $25.0 million. In addition, under the SVB Facility, the Company is able to utilize the facility as security for letters of
credit.
The amounts borrowed under the revolving credit facility will bear interest, payable monthly, at a
floating rate that is SVBs prime rate plus 2.5%. The minimum interest rate is 6.5%. The Companys obligations under the SVB Facility are secured by substantially all of its personal property assets and those of its subsidiaries, including
their intellectual property. The SVB Facility contains certain financial covenants, and customary affirmative and negative covenants. If Zhone does not comply with the various covenants and other requirements under the SVB Facility, SVB is entitled,
among other things, to require the immediate repayment of all outstanding amounts and to sell Zhones assets to satisfy the obligations under the SVB Facility.
Reverse Stock Split
On March 11, 2010, the
Company filed a Certificate of Amendment with the Delaware Secretary of State to amend the Companys Certificate of Incorporation, which the amendment effected a one-for-five reverse stock
77
split of Zhone common stock and reduced the authorized shares of common stock from 900,000,000 to 180,000,000. No fractional shares of common stock were issued as a result of the reverse stock
split and shareholders of record will receive cash in lieu of the fractional shares to which they would otherwise be entitled, based on the closing price of Zhone common stock on March 10, 2010. References to shares of Zhone common stock,
warrants and stock options (and associated dollar amounts) in this Form 10-K for the year ended December 31, 2009 are provided on a post-reverse stock split basis.
(16) Quarterly Information (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2009
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
(in thousands, except per share data)
|
|
Net revenue
|
|
$
|
24,103
|
|
|
$
|
30,346
|
|
|
$
|
36,016
|
|
|
$
|
36,036
|
|
Gross profit
|
|
|
7,813
|
|
|
|
11,056
|
|
|
|
12,067
|
|
|
|
14,459
|
|
Operating income (loss)
|
|
|
(6,596
|
)
|
|
|
(1,954
|
)
|
|
|
(894
|
)
|
|
|
751
|
|
Net income (loss)
|
|
|
(6,903
|
)
|
|
|
(2,264
|
)
|
|
|
(1,204
|
)
|
|
|
344
|
|
Net income (loss) per share (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.23
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
Diluted
|
|
|
(0.23
|
)
|
|
|
(0.08
|
)
|
|
|
(0.04
|
)
|
|
|
0.01
|
|
Weighted-average shares outstanding (a)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
30,144
|
|
|
|
30,183
|
|
|
|
30,222
|
|
|
|
30,254
|
|
Diluted
|
|
|
30,144
|
|
|
|
30,183
|
|
|
|
30,222
|
|
|
|
32,730
|
|
|
|
|
|
Year ended December 31, 2008
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
(in thousands, except per share data)
|
|
Net revenue
|
|
$
|
43,033
|
|
|
$
|
40,069
|
|
|
$
|
32,020
|
|
|
$
|
31,038
|
|
Gross profit
|
|
|
13,806
|
|
|
|
11,616
|
|
|
|
9,644
|
|
|
|
9,998
|
|
Gain on sale of intangible assets
|
|
|
(3,204
|
)
|
|
|
(93
|
)
|
|
|
|
|
|
|
(1,100
|
)
|
Impairment of goodwill
|
|
|
|
|
|
|
70,401
|
|
|
|
|
|
|
|
|
|
Operating loss (b)
|
|
|
(888
|
)
|
|
|
(80,091
|
)
|
|
|
(6,153
|
)
|
|
|
(4,294
|
)
|
Net loss
|
|
|
(941
|
)
|
|
|
(80,334
|
)
|
|
|
(6,529
|
)
|
|
|
(4,731
|
)
|
Basic and diluted net loss per share (a)
|
|
$
|
(0.03
|
)
|
|
$
|
(2.67
|
)
|
|
$
|
(0.22
|
)
|
|
$
|
(0.16
|
)
|
Weighted-average shares outstanding used to compute basic and diluted net loss per share (a)
|
|
|
30,014
|
|
|
|
30,052
|
|
|
|
30,089
|
|
|
|
30,119
|
|
(a)
|
All per share and weighted average share amounts have been adjusted to retroactively reflect the one-for-five reverse split effected on
March 11, 2010.
|
(b)
|
Operating loss included a $1.1 million gain on sale of patents during the fourth quarter ended December 31, 2008, a $3.2 million and $0.1
million gain on sale of intangible assets related to the GigaMux legacy product line during the first and second quarters ended March 31, 2008 and June 30, 2008, respectively, and $70.4 million of goodwill impairment during the second
quarter ended June 30, 2008.
|
78
ITEM 9.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
ITEM 9A.
|
CONTROLS AND PROCEDURES
|
Disclosure
Controls and Procedures
We conducted an evaluation of the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this report. The controls evaluation was done under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial
Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted in this Part II, Item 9A, as of the end of the period covered by this report, our disclosure
controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods
specified by the SEC, and that material information relating to Zhone and its consolidated subsidiaries is made known to management, including our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic
reports are being prepared.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Management assessed the effectiveness of our
internal control over financial reporting as of December 31, 2009, the end of our fiscal year. In making this assessment, management used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
the report entitled Internal Control-Integrated Framework. Based on our assessment of internal control over financial reporting, management has concluded that, as of December 31, 2009, our internal control over financial reporting
was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. Our independent
registered public accounting firm, KPMG LLP, has issued an attestation report on our internal control over financial reporting. Such report appears at page 50.
Changes in Internal Control Over Financial Reporting
There
were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Inherent Limitations on Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent
or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control systems objectives will be met. The design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and
that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or
79
by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or procedures.
ITEM 9B.
|
OTHER INFORMATION
|
Revolving Line of Credit Renewal
On March 15, 2010, we renewed our existing SVB
Facility with SVB to provide liquidity and working capital through March 15, 2011.
Under the SVB
Facility, we have the option of borrowing funds at agreed upon interest rates. The amount that we are able to borrow under the SVB Facility will vary based on the eligible accounts receivable, as defined in the agreement, as long as the amount
outstanding does not exceed $25.0 million. In addition, under the SVB Facility, we are able to utilize the facility as security for letters of credit.
The amounts borrowed under the revolving credit facility will bear interest, payable monthly, at a floating rate that is SVBs prime rate plus 2.5%. The minimum interest rate is 6.5%. Our obligations
under the SVB Facility are secured by substantially all of our personal property assets and those of our subsidiaries, including our intellectual property. The SVB Facility contains certain financial covenants, and customary affirmative and negative
covenants. If we do not comply with the various covenants and other requirements under the SVB Facility, SVB is entitled, among other things, to require the immediate repayment of all outstanding amounts and to sell our assets to satisfy the
obligations under the SVB Facility. The foregoing description of the SVB Facility does not purport to be complete and is qualified in its entirety by reference to the March 2010 Amendment with an effective date of March 15, 2010, which
is filed as Exhibit 10.21 to this report and incorporated herein by reference.
Reverse Stock Split
On March 11, 2010, we filed a Certificate of Amendment with the Delaware Secretary of State to amend Zhones
Certificate of Incorporation, which amendment effected a one-for-five reverse stock split of Zhone common stock and reduced the authorized shares of common stock from 900,000,000 to 180,000,000. No fractional shares of common stock were issued as a
result of the reverse stock split and shareholders of record will receive cash in lieu of the fractional shares to which they would otherwise be entitled, based on the closing price of Zhone common stock on March 10, 2010. References to shares
of Zhone common stock, warrants and stock options (and associated dollar amounts) in this Form 10-K for the year ended December 31, 2009 are provided on a post-reverse stock split basis.
80
PART III
ITEM 10.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this item relating to our directors and nominees, and compliance with Section 16(a) of the Securities Exchange Act of 1934 is included under the
captions Corporate Governance Principles and Board Matters, Ownership of Securities and Proposal 1: Election of Directors in our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders and is
incorporated herein by reference.
The information required by this item relating to our executive officers is
included under the caption Executive Officers in Part I of this Form 10-K and is incorporated by reference into this section.
We have adopted a Code of Conduct and Ethics applicable to all of our employees, directors and officers (including our principal executive officer, principal financial officer, principal accounting
officer and controller). The Code of Conduct and Ethics is designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The full text of our Code of Conduct and Ethics is published on
our website at
www.zhone.com
. We intend to disclose future amendments to certain provisions of our Code of Conduct and Ethics, or waivers of such provisions granted to executive officers and directors, on our website within four business days
following the date of such amendment or waiver.
ITEM 11.
|
EXECUTIVE COMPENSATION
|
The information required by this item is included under the captions Executive Compensation and Compensation Committee Report in our definitive Proxy Statement for the 2010 Annual
Meeting of Stockholders and is incorporated herein by reference.
ITEM 12.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The information required by this item relating to security ownership of certain beneficial owners and management, and
securities authorized for issuance under equity compensation plans is included under the captions Ownership of Securities and Executive Compensation in our definitive Proxy Statement for the 2010 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this item is included under the captions Certain Relationships and Related Transactions and Corporate Governance Principles and Board
Matters in our definitive Proxy Statement for the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
ITEM 14.
|
PRINCIPAL ACCOUNTANT FEES AND SERVICES
|
The information required by this item is included under the caption Proposal 2: Ratification of Appointment of Independent Registered Public Accounting Firm in our definitive Proxy Statement
for the 2010 Annual Meeting of Stockholders and is incorporated herein by reference.
81
PART IV
ITEM 15.
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
|
The Index to Consolidated Financial Statements on page 48 is incorporated herein by reference as the list of financial statements required as part of this report.
The Exhibit Index on page 84 is incorporated herein by reference as the list of exhibits required as part of this report.
82
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
|
ZHONE TECHNOLOGIES, INC.
|
|
|
|
|
Date: March 16, 2010
|
|
|
|
By:
|
|
/
S
/ M
ORTEZA
E
JABAT
|
|
|
|
|
|
|
Morteza Ejabat
|
|
|
|
|
|
|
Chief Executive Officer
|
Know all persons by these presents, that each person whose signature appears below constitutes and appoints Morteza Ejabat and Kirk Misaka, jointly and severally, his attorneys-in-fact, each with the full
power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/
S
/ M
ORTEZA
E
JABAT
Morteza Ejabat
|
|
Chairman of the Board of Directors, President, and Chief Executive Officer (Principal Executive
Officer)
|
|
March 16, 2010
|
|
|
|
/
S
/ K
IRK
M
ISAKA
Kirk Misaka
|
|
Chief Financial Officer,
Treasurer and Secretary (Principal Financial and Accounting Officer)
|
|
March 16, 2010
|
|
|
|
/
S
/ M
ICHAEL
C
ONNORS
Michael Connors
|
|
Director
|
|
March 16, 2010
|
|
|
|
/
S
/ R
OBERT
D
AHL
Robert Dahl
|
|
Director
|
|
March 16, 2010
|
|
|
|
/
S
/ J
AMES
H. G
REENE
,
J
R
.
James H. Greene, Jr.
|
|
Director
|
|
March 16, 2010
|
|
|
|
/
S
/ C. R
ICHARD
K
RAMLICH
C. Richard Kramlich
|
|
Director
|
|
March 16, 2010
|
|
|
|
/
S
/ J
AMES
T
IMMINS
James Timmins
|
|
Director
|
|
March 16, 2010
|
83
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
Filed
Herewith
|
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
3.1
|
|
Restated Certificate of Incorporation dated February 16, 2005
|
|
10-K
|
|
000-32743
|
|
3.1
|
|
March 16, 2005
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Certificate of Amendment of Restated Certificate of Incorporation dated March 11, 2010
|
|
10-K
|
|
000-32743
|
|
3.2
|
|
March 16, 2010
|
|
X
|
|
|
|
|
|
|
|
3.3
|
|
Amended and Restated Bylaws
|
|
10-K
|
|
000-32743
|
|
3.3
|
|
March 16, 2005
|
|
|
|
|
|
|
|
|
|
4.1
|
|
Form of Second Restated Rights Agreement dated November 13, 2003
|
|
10-Q
|
|
000-32743
|
|
4.1
|
|
May 14, 2004
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Zhone Technologies, Inc. 1999 Stock Option Plan
|
|
10
|
|
000-50263
|
|
10.2
|
|
April 30, 2003
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan
|
|
8-K
|
|
000-32743
|
|
10.1
|
|
May 17, 2007
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Form of Stock Option Agreement for the Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan
|
|
8-K
|
|
000-32743
|
|
10.1
|
|
September 1, 2006
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Zhone Technologies, Inc. Amended and Restated Special 2001 Stock Incentive Plan
|
|
10-Q
|
|
000-32743
|
|
10.28
|
|
August 15, 2002
|
|
|
|
|
|
|
|
|
|
10.5
|
|
Form of Restricted Stock Award Agreement for the Zhone Technologies, Inc. Amended and Restated 2001 Stock Incentive Plan
|
|
8-K
|
|
000-32743
|
|
10.2
|
|
May 17, 2007
|
|
|
|
|
|
|
|
|
|
10.6
|
|
Zhone Technologies, Inc. 2002 Employee Stock Purchase Plan
|
|
8-K
|
|
000-32743
|
|
10.1
|
|
May 17, 2006
|
|
|
|
|
|
|
|
|
|
10.7
|
|
Incentive Awards Program Summary
|
|
8-K
|
|
000-32743
|
|
10.2
|
|
March 15, 2006
|
|
|
|
|
|
|
|
|
|
10.8
|
|
Form of Indemnity Agreement between Zhone Technologies, Inc. and its directors and officers
|
|
10-Q
|
|
000-32743
|
|
10.20
|
|
May 14, 2004
|
|
|
|
|
|
|
|
|
|
10.9
|
|
Letter Agreement dated November 13, 2003 between Zhone Technologies, Inc. and KKRZT, L.L.C.
|
|
Schedule 13D
|
|
005-61973
|
|
4
|
|
November 24, 2003
|
|
|
|
|
|
|
|
|
|
10.10
|
|
Letter Agreement dated May 24, 2006 between Zhone Technologies, Inc. and KKRZT, L.L.C.
|
|
10-K
|
|
000-32743
|
|
10.10
|
|
March 8, 2007
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Letter Agreement dated November 13, 2003 between Zhone Technologies, Inc. and New Enterprise Associates VIII, Limited Partnership
|
|
Schedule 13D
|
|
005-61973
|
|
5
|
|
November 24, 2003
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
Filed
Herewith
|
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
10.13
|
|
Loan and Security Agreement dated March 30, 2001 between Zhone Technologies, Inc. and Fremont Investment and Loan
|
|
10
|
|
000-50263
|
|
10.21
|
|
April 30, 2003
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Pledge and Assignment of Cash Collateral Account dated March 30, 2001 between Zhone Technologies, Inc. and Fremont Investment and Loan
|
|
10
|
|
000-50263
|
|
10.22
|
|
April 30, 2003
|
|
|
|
|
|
|
|
|
|
10.15
|
|
Secured Promissory Note dated March 30, 2001 between Zhone Technologies, Inc. and Fremont Investment and Loan
|
|
10
|
|
000-50263
|
|
10.23
|
|
April 30, 2003
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Second Amendment to Deed of Trust and Other Loan Documents dated December 27, 2005 between Zhone Technologies, Inc., Zhone Technologies Campus, LLC, and Fremont Investment
& Loan
|
|
8-K
|
|
000-32743
|
|
10.1
|
|
December 27, 2005
|
|
|
|
|
|
|
|
|
|
10.17
|
|
Purchase and Sale Agreement with Repurchase Options dated January 20, 2000 between Zhone Technologies, Inc. and the Redevelopment Agency of the City of Oakland
|
|
10
|
|
000-50263
|
|
10.28
|
|
April 30, 2003
|
|
|
|
|
|
|
|
|
|
10.18
|
|
Amended and Restated Employment Agreement dated November 8, 2007 by and between Zhone Technologies, Inc. and Morteza Ejabat
|
|
10-K
|
|
000-32743
|
|
10.27
|
|
March 6, 2008
|
|
|
|
|
|
|
|
|
|
10.19
|
|
Second Amended and Restated Loan and Security Agreement with an effective date of March 16, 2009 among Zhone Technologies, Inc., ZTI Merger Subsidiary III, Inc. and Silicon Valley
Bank
|
|
10-K
|
|
000-32743
|
|
10.19
|
|
March 16, 2009
|
|
|
|
|
|
|
|
|
|
10.20
|
|
Loan and Security Agreement (EXIM Facility) with an effective date of March 16, 2009 among Zhone Technologies, Inc., ZTI Merger Subsidiary III, Inc. and Silicon Valley
Bank
|
|
10-K
|
|
000-32743
|
|
10.20
|
|
March 16, 2009
|
|
|
|
|
|
|
|
|
|
10.21
|
|
March 2010 Amendment with an effective date of March 15, 2010 among Zhone Technologies, Inc., ZTI Merger Subsidiary III, Inc. and Silicon Valley Bank
|
|
10-K
|
|
000-32743
|
|
|
|
March 16, 2010
|
|
X
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
Exhibit
Number
|
|
Exhibit Description
|
|
Incorporated by Reference
|
|
Filed
Herewith
|
|
|
Form
|
|
File
Number
|
|
Exhibit
|
|
Filing Date
|
|
|
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries
|
|
10-K
|
|
000-32743
|
|
21.1
|
|
March 6, 2008
|
|
|
|
|
|
|
|
|
|
23.1
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
24.1
|
|
Power of Attorney (see signature page)
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a)
|
|
|
|
|
|
|
|
|
|
X
|
|
|
|
|
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
X
|
86
Zhone Technologies (MM) (NASDAQ:ZHNED)
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Zhone Technologies (MM) (NASDAQ:ZHNED)
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